Peabody nixes $3.8B Anglo coal deal

Anglo American’s (LSE: AAL) efforts to streamline its business have hit a major roadblock after Peabody Energy (NYSE: BTU) scrapped a $3.8-billion (C$5.27-billion) deal to acquire its Australian metallurgical coal assets.

The deal collapsed after a fire at Anglo’s Moranbah North mine in Queensland, which Peabody argued constituted a “material adverse change,” a contractual clause that allowed it to withdraw.

Anglo strongly disputes that interpretation and said Tuesday it will initiate arbitration to claim damages for wrongful termination.

The blaze, triggered by high gas levels in April, halted operations at Moranbah North, one of the most valuable mines included in the package. Peabody maintains that the incident had long-term material impacts and attempted to renegotiate terms. When talks failed, the company pulled out, also canceling plans to on-sell one of Anglo’s mines to an Indonesian buyer.

Anglo countered that there was no lasting damage to equipment or infrastructure, and that progress was being made toward restarting the mine. CEO Duncan Wanblad said he was “very disappointed” by Peabody’s decision but stressed that other bidders had shown strong interest in the assets during the sales process.

Shares in Anglo American closed less than 1% higher in London at £21.45 apiece while Peabody Energy fell 3.5% to end the day at $16.50 each in New York. 

Anglo restructuring

Anglo American’s coking coal operations produce about 16 million tonnes a year and generated nearly a fifth of the group’s earnings last year. Their sale had been billed as the simplest step in a wider restructuring designed to concentrate on copper and iron ore, following the spinout of its platinum group metals unit and efforts to find a buyer for De Beers.

The coal sale was seen by investors as a key test of Anglo’s ability to generate cash and deliver on its divestment strategy after rebuffing a $49-billion takeover approach from BHP (NYSE, LSE, ASX: BHP) last year. Instead, the company is heading into arbitration that analysts say may drag on until 2026, forcing it to revisit the sale process at a time when coal prices have softened.

For Peabody Energy of St. Louis, the $3.8-billion acquisition was meant to lift its position in steelmaking coal. Analysts had warned the deal looked rich, noting the price was nearly twice Peabody’s market capitalization when the agreement was signed.

“Each side is confident in its own position from a legal perspective,” Jefferies analysts said this month, noting that a protracted arbitration could weigh on both companies’ share prices.