Peabody battle for Macarthur Coal turns ugly

Vancouver – First, Macarthur Coal (MCC-A) inked a friendly deal with to acquire Gloucester Coal (GCL-A), which is majority-owned by Singapore-listed raw materials giant Noble Group, in an all-share deal worth at least A$670 million.

Then, as the mid-April shareholder meeting to approve the Noble deal approached, St.Louis-based coal giant Peabody Energy (BTU-N) announced an all-cash takeover bid for Macarthur, contingent on the Noble deal not proceeding. Peabody offered A$13 for each Macarthur share, valuing the coal miner at A$3.3 billion.

Macarthur rejected the deal. Days later, Peabody upped its offer to A$14 per share, valuing the pulverized coal injection (PCI) supplier at A$3.6 billion.

The new offer provided a 22% premium to Macarthur’s 30-day, volume-weighted average share price up to the end of March, when Peabody announced its original bid. Peabody also offered Macarthur’s three largest shareholders – CITIC Group, ArcelorMittal, and POSCO, which collectively control 34.8% of the company – avenues to retain their stakes. But Peabody still demanded Macarthur drop its plans to acquire Gloucester, as the energy major thinks the Macarthur is paying too much for the thermal and coking coal miner.

In December, Macarthur offered 0.84 of a share for each Gloucester share, implying a price of A$8.16 per share at the time. Using that implied price, the deal valued Gloucester at A$669 million. But Peabody is arguing that Macarthur is actually paying more like A$1 billion in shares for the company, based in its offer price of A$14 for each Macarthur share. In addition, since the takeover battle began Macarthur’s share price has climbed from the A$12 range to between A$14 and A$15.

Peabody also says the deal essentially allows Noble to acquire a large ownership stake – 24.4% – in Macarthur at a significant discount. That argument hinges in part on the option for Gloucester shareholders to receive A$8 in cash, rather than 0.84 of a Macarthur share, for each Gloucester share held. The cash option values Macarthur shares at A$9.70 a piece. However, Noble owns 87.7% of Gloucester’s shares and has agreed to accept shares, not cash, in the Gloucester deal.

Regardless of Peabody’s arguments, Macarthur quickly rejected Peabody’s sweetened offer, though not before the players involved in the situation had time to issue some forthright news releases.

Macarthur’s response was the most formal, taking the form of a normal news release outlining the reasons for opposing the Peabody deal. Those reasons include an insignificant premium to the current share price, especially given that forecasts for the PCI coal industry in the short term are generally quite optimistic; the fact that Peabody did not arrange financing for the transaction prior to making the offer, which leaves open the possibility that the deal could fail; and a strong disagreement about the benefits of the Gloucester deal, which of course the Macarthur board strongly supports.

The news release from the Noble Group, on the other hand, was informal and disparaging. In it the board of directors likened Macarthur’s response to the Peabody bid to “the same enthusiasm as a lost and hungry hiker who stumbles across a road-kill Roo that had been in the sun too long and not surprisingly said ‘no thanks.'” The board then outlined the joint Noble-Macarthur rationale for the Gloucester deal and followed with this:

“Life was great until a few days ago when, instead of jumping on their horses, the Americans charged into town on a Gulfstream jet for the afternoon and plunked a bid down that was a great deal for them, and not, in our view, anywhere near what was already on the table. Hats off to them for being opportunistic and crafty; it ruined our Easter weekend. So, now, instead of looking for eggs with our kids, we have to draft this release…”

Peabody responded to the negative news release with a more formal but still quite personal response, which started with the following.

“Noble Group’s press release today takes an oddly personal tone, complaining of holiday work and Australian credentials. What it doesn’t do, though, is lay out any convincing evidence that Noble’s transaction is adequate… It is ironic that Noble, a Hong Kong-based company listed in Singapore, would criticize any other company for being foreign headquartered. Peabody stands on its track record in Australia, which includes decades of operating experience and dates back to 1962 when we built the first major export mine in Australia… some 25 years before Noble was founded.”

In a final attempt to keep its takeover bid alive, Peabody called on the Takeovers Panel to block Macarthur’s April 12 shareholder vote on the Gloucester deal. As The Northern Miner went to press, Macarthur had just postponed the meeting and vote until April 19.

Regardless of the combative banter, most analysts watching the situation agreed that Peabody’s bid was too low. Macquarie analyst Sophie Spartalis and Morgan Stanley analyst Cameron Judd independently noted Peabody would have to increase its bid to A$16 per share in order to succeed. Penaga Capital analyst Tim Schroeders wrote Peabody “needs to get serous or go away.”

And David Haddad, a resource analyst with RBC Capital Markets, noted that major steelmakers Posco and ArcelorMittal both purchased stakes in Macarthur two years ago, with the intent of ensuring Macarthur does not end up in the hands of another steel producer. Haddad did not believe either major shareholder was interested in selling its stake at a loss.

Macarthur already operates two coal mines in Queensland, where it is based, and is one of the world’s largest producers of PCI coal, which is used to make steel. The company is also developing new mines and plans to double production in five years.