Melbourne: Rio Tinto and Mitsubishi Corp have proposed buying out Coal & Allied for A$1.49 billion ($1.56 billion), aiming to take full control of the Australian miner to take advantage of strong coal prices.
Rio and Mitsubishi offered A$122 a share, a 34% premium to the coal miner’s last trade, to buy out the 14% they do not already own. Coal & Allied shares surged 28% to a four-month high.
Top institutional shareholder Perpetual Investments, which owns 6.3%, backed the offer. That makes the takeover nearly certain to be completed once Rio Tinto and Mitsubishi finalize their agreement to enter a joint bid.
Despite a strong currency, global economic uncertainty and new taxes, Australian resource companies have been sought-after takeover targets as the demand boom from China, India driving commodity prices is expected to continue.
The bid follows Peabody Energy and ArcelorMittal’s $5 billion hostile bid for Macarthur Coal and Rio Tinto’s $4 billion takeover of Mozambique-focused coal miner Riversdale Mining earlier this year.
Mitsubishi appeared set to fund about 70% of the deal and the proposal would see it double its stake in Coal & Allied to 20%. Rio Tinto would increase its stake to 80% from 75.7%.
That would boost Mitsubishi’s equity holding in thermal coal production to nearly 13 million tonnes a year without having to pay the hefty prices that Indian companies have been paying for coal projects in Australia and Indonesia.
“It would be a lot cheaper for Mitsubishi to buy shares in the company they know well than acquiring a stake in a new mine,” said Yasuhiro Narita, an analyst at Nomura Securities.
Rio Tinto shareholders barely took notice of the deal on a day when the rest of the market was focused on global debt worries.
“It makes sense, whether or not they believe there’s value in there. They own three-quarters of the company, so they’re just bringing the rest of it in-house,” said Ric Ronge, a portfolio manager at Pengana Capital, which owns Rio Tinto shares.
Coal & Allied said the offer, valuing the whole group at $11.1 billion, was incomplete and was not capable of being accepted.
“We will be carefully considering the indicative proposal, but at this stage have not formed any views in relation to either whether a shareholder meeting will be convened, or, more generally, the indicative proposal, including price,” said Bryan Davis, chairman of Coal & Allied’s proposal response committee.
While the planned offer was a 34% premium, it is well below Coal & Allied’s high of A$135 a share in January.
Perpetual said it was willing to sell out as the offer was above its current valuation on the company and its fundholders had already reaped a 17% compound annual return before dividends on their stake in the company over the past 10 years.
“Rio and Mitsubishi are the only potential buyers of this asset,” Perpetual said.
Coal & Allied shares rose as high as A$119.03 and last traded up 27% A$115.18 holding about 5% below the proposed bid as a formal offer was not yet on the table. Rio Tinto shares sank 5.4% to a 13-month low.
Coal & Allied mines thermal coal and semi-soft coking coal in the Hunter Valley. Last week it reported a 41% jump in first-half profit to A$227 million, bolstered by a 25% increase in both sales volumes and prices.
“These strong market conditions are expected to continue for the remainder of the year and we will increasingly see these higher prices flow into revenue as contracts are renewed,” Coal & Allied’s managing director, Bill Champion, said last week.
Since the earthquake in Japan in March, lower thermal coal demand from Australia’s No.1 customer has kept prices largely flat around $120 per tonne, but they remain historically strong.
Rio Tinto said if the bid went ahead and was successful, that would simplify the ownership structure of Coal & Allied and allow it to be delisted.
“It would give us greater flexibility in running its operations,” Rio Tinto spokeswoman Karen Halbert said, adding that Rio Tinto was still in discussions with Mitsubishi.
A Mitsubishi spokesman said the company believed the offer was attractive to Coal & Allied shareholders.