Bloomberg News

ArcelorMittal, Peabody to Submit Hostile Bid for Macarthur

August 01, 2011

(Updates with comparative deals in 11th paragraph.)

Aug. 1 (Bloomberg) -- ArcelorMittal and Peabody Energy Corp. will put their bid valuing Macarthur Coal Ltd., the world’s biggest maker of pulverized coal, at A$4.7 billion ($5.2 billion) to shareholders after talks for an agreed deal broke down.

Peabody, based in St. Louis, and ArcelorMittal, the world’s largest steelmaker, will proceed with their A$15.50-a-share cash bid after rejecting Macarthur’s proposal for an agreed deal if the offer was raised to A$18 a share, the Brisbane-based company said today in a statement.

Buying Macarthur would give Peabody and ArcelorMittal, its second-largest shareholder, mines producing steelmaking coal in Australia as prices trade near a record and suitors vie for targets. Macarthur, which is trading above the offer price, said it’s in talks with other parties for alternative offers.

“If cash is going to be successful, I would think the price should be markedly higher than Peabody and ArcelorMittal’s initial offer,” Andrew Pedler, a senior analyst at Wilson HTM Investment Group in Brisbane, said by phone. “I wouldn’t discount an alternative offer.”

Macarthur rose 1.8 percent to A$15.83 at the 4:10 p.m. close in Sydney trading. The stock closed at A$11.08 on July 11 before the takeover proposal was first announced.

Confirmed Bid

Peabody and ArcelorMittal confirmed in a statement their A$15.50-a-share cash bid, valuing Macarthur at about A$4.7 billion. Macarthur shareholders will also be entitled to retain any final dividend up to 16 cents a share, without reducing the offer price, the two companies said. That represents total value of A$15.66 a share, or a 41 percent premium, they said.

The offer is being made by PEAMCoal Pty, to be owned 60 percent by Peabody and 40 percent by ArcelorMittal, the companies said. The bidding company already has a 16.1 percent stake in Macarthur and financing has been secured, they said.

Peabody and ArcelorMittal had been willing to raise their offer to A$16 a share, which included a provision barring talks with potential rival bidders, Macarthur said. The Australian company said it would recommend the A$16 proposal, subject to its own conditions, including an increase to A$18 a share once the suitors held more than 90 percent of its stock. Peabody and ArcelorMittal rejected the counter proposal.

The offer “appears opportunistic,” Macarthur Chairman Keith DeLacy said in the statement. “The board is strongly of the view that it should do all that it can to facilitate” potential rival bids, the company said.

‘Take no Action’

Macarthur told its shareholders to take no action in regard to the offer.

The offer is the second-biggest coal deal announced this year, after Alpha Natural Resources Inc.’s $7.1 billion takeover of Massey Energy Co. in January, according to data compiled by Bloomberg. It’s the best first half in at least 12 years, according to the data, with $21.3 billion in announced deals.

Peabody and ArcelorMittal are willing to pay the equivalent of $27 for each ton of Macarthur’s coal reserves and $3 a ton of its coal resources, Morgan Stanley said in a July 12 report. Both valuations are “toward the upper end,” of similar coal transactions over the past few years, it said.

The average price for deals in the same coal region, Australia’s Bowen Basin, is $3.30 a ton of resource, Morgan Stanley said. Macarthur owns a resource of more than 1.5 billion tons of coal and a reserve of 172.4 million tons, it said.

‘Unrelenting’ Demand

Credit Suisse Group AG last month raised its price forecasts for coking coal by an average 15 percent for 2014-2018, citing “unrelenting” demand. Prices jumped 47 percent to a record $330 a metric ton in the second quarter.

Macarthur is being advised by JPMorgan Australia Ltd. and Corrs Chambers Westgarth. ArcelorMittal is advised by RBC Capital Markets LLC and Mallesons Stephen Jaques. UBS AG, Bank of America Merrill Lynch, Morgan Stanley and Freehills are advising Peabody.

“Following due diligence, Peabody and ArcelorMittal attempted to negotiate a bid implementation agreement (BIA) with Macarthur,” the two companies said. “However, Macarthur was not willing to engage on a BIA on customary terms even with Peabody and ArcelorMittal’s willingness to improve the price from the original proposal if such a BIA could be agreed.”

Teck Resources Ltd. and Anglo American Plc could be potential rival bidders, the Australian Financial Review said in its Street Talk column on July 27 without citing anyone.

Rio, Yanzhou

Rio Tinto Group and Yanzhou Coal Mining Co. may also be interested, the newspaper reported on July 18, without saying where it got the information.

Macarthur may seek a rival offer that would involve its largest shareholder Citic Group, RBS Morgans Ltd. said in a report on July 26. Citic’s director on the Macarthur board, Chen Zeng, has not been involved in any deal discussions and has taken a leave of absence to avoid a potential conflict of interest, Macarthur said today.

Macarthur was the subject last year of competing bids for control from Peabody, New Hope Corp. and Noble Group Ltd. An investment bank acting for Xstrata Plc in April 2010 also had approached a “substantial” Macarthur shareholder, Macarthur said last year. Macarthur ended deal talks with ArcelorMittal in June 2008 after the steelmaker bought a 14.9 percent stake.

Earnings Multiple

Peabody and ArcelorMittal are offering to pay 20.8 times earnings before interest, tax, depreciation and amortization, compared with the median multiple of 16.4 times for 10 coal mining industry deals compiled by Bloomberg data. Macarthur is trading at 18.83 times earnings compared with 16.6 times for Peabody and 16.09 times for ArcelorMittal.

The Peabody and ArcelorMittal bid only needs to be accepted by at least 50.01 percent of shareholders. Citic Group owns 24.3 percent of Macarthur and Posco 7.1 percent as at March 31, according to a company filing.

“An offer that contains a scrip component would give them a much more interested hearing from the major industry shareholders than one that is purely cash,” said Wilson HTM’s Pedler. “Each of which is there for strategic reasons. Now if they get paid out in cash, the strategic reason for being there vanishes.”

--With assistance from Jesse Riseborough in London Editors: John Viljoen, Tony Barrett

To contact the reporters on this story: Soraya Permatasari in Melbourne at soraya@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net


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