Deal of the century

 Coal is the new gold. Last year saw the coal mining industry draw a number of high investments amidst predictions of shaky markets, as well as seeing some of the largest takeover and merger activity in Australia’s history, more than gold ever did despite gold’s continually skyrocketing price.

The US$5 billion Peabody and Macarthur takeover deal, and the $2.25 billion Whitehaven and Aston merger are two perfect examples of the movement in the coal market.

So why is coal seemingly unstoppable, and why has its solid rise been overshadowed by gold’s rise?

 

Black gold

It has been a consistently strong, if not exactly skyrocketing commodity, which is predicted to have a bright future.

As countries such as China and India continue their aggressive economic development, Australia is fuelling their growth, due to its very unique position of being a developed country with under developed resources, as well as being in a location closer to both of these two nations than other major coal producers in South America or Africa.

Only Indonesia boasts a better position and similarly fertile ground.

Being such a young country, yet being a first world nation, puts us all in a rather enviable position, one which miners are trying to utilise.

While our coal ties with China are well known, the ones with India are set to grow, particularly as the country is in the grips of an energy crisis and suffering constant rolling blackouts.

Added to this is the battle over whether to sell uranium to India for energy generation, which is still going ahead despite protests from some in the government, which makes coal seem not exactly harmless but definitely the lesser of two evils.

China and India alone, economic powerhouses that they are, have managed to create an almost perfect storm for coal.

However, despite the Government seemingly linking the massive Whitehaven and Macarthur deals with the upcoming Mineral Resources Rent Tax, to show no damage to investor confidence, these deals have been in the offing for some time.

 

Deal of the century

Speaking to Tony Damian, a partner at Freehills – the law firm which advised Peabody on the Macarthur deal and Aston Resources in its merger with Whitehaven, he told Australian Mining that Macarthur has been a target since 2010 when it came under scrutiny from Peabody, Gloucester Coal, and New Hope.

Macarthur was eventually acquired by Peabody Energy in what Damian described as "the largest coal takeover in Australian history".

However it was not the most straight forward takeover.

It began as a joint hostile bid with existing shareholder Acelor Mittal, who exercised an option to tender shares into the bid.

Damian explained that "it was a bit difficult for Peabody to carry out a solo hostile takeover as Macarthur had such a complex register which was very congested, and it included three major shareholders who held about 48 per cent of the company and had not supported a similarly priced bid in 2010".

This forced the move with Arcelor, which Damian termed a "novel deal structure".

Peabody gave Arcelor options to stay in the bid, be a joint venture partner in the coal mine, or be paid out.

"They made it very easy for Arcelor," he said.

By taking a much more open approach, Peabody managed to convince 99.2 per cent of Macarthur Coal’s register to accept the deal.

The deal was arranged using a US$ 3 billion bond issue and US$ 2 billion of finance.

Damian went on to say that this deal has been a model for acquisitions where there are congested share registers and a number of companies which hold 15 per cent or 20 per cent each.

"Peabody’s approach to this deal is a blue print for how to carry out similarly difficult deals, and shows that despite large shareholders on the register a company can still be acquired."

Following this acquisition, Peabody is reportedly still looking to grow its presence in Australia, by "accelerating production for its existing assets and advancing its growth pipeline," Damian said.

 

The M&A landscape

Despite fear over the damage the Mineral Resources Rent Tax may have to the mergers and acquisition space, it is unlikely to dissuade all investment and continued growth of the industry in Australia.

However, the Government’s use of these two deals as proof that it has not rocked the mining industry’s confidence is seen as a "one size fits all" response, where in fact it was in the offing well before the tax was finalised.

While these deals have highlighted the growing prominence of coal, it has also showcased the kind of M&A activity that will become less likely following the implementation of the tax.