Bloomberg News

Whitehaven Back as Target as Tinkler Faces Debt: Real M&A

January 16, 2013

Whitehaven Coal Ltd. (WHC) is returning as a takeover target, less than two years after a company-run auction failed and its biggest shareholder shelved a buyout.

With Nathan Tinkler, Whitehaven’s largest shareholder, struggling to repay creditors and coal prices tumbling last year, the Sydney-based company’s value relative to net assets halved since Tinkler began preparing an ill-fated bid. That left Whitehaven as the cheapest coal producer based in Australia versus book value, according to data compiled by Bloomberg.

Now, analysts are projecting coal prices will rebound from the steepest annual decline in seven years. Whitehaven’s takeover appeal is also increasing as the A$3.5 billion ($3.7 billion) company obtained financing and government approval for its biggest new project and expects to almost double production this fiscal year, according to Nomura Holdings Inc. A buyer could pay A$4.4 billion, less than Tinkler’s bid last year, according to Wilson HTM Investment Group. Possible suitors include Yanzhou Coal Mining Co. and China Shenhua Energy Co. (1088), said Investec Plc and Patersons Securities Ltd.

“There are plenty of groups out there that are probably interested,” Andrew Harrington, an analyst at Patersons in Sydney, said in a telephone interview. In Australia, Whitehaven “has the best growth profile of the pure coal plays. You could count on one hand companies that are in production that haven’t already been taken over. That’s what would make it attractive.”

Takeover Attempts

Whitehaven “must be on the radar screen for anybody who’s interested in having a position in the industry that’s not here at the moment,” the company’s managing director, Tony Haggarty, said in a Jan. 8 phone interview.

Whitehaven rose 2.4 percent to A$3.45 in Sydney today, its biggest gain in nearly a month, as the S&P/ASX 200 Index rose 0.5 percent.

Kate Kerrison, a spokeswoman for Whitehaven, couldn’t immediately comment about the potential of a sale when reached by phone. Tim Allerton, a spokesman for Tinkler Group Pty, declined to comment on plans for Tinkler’s stake in Whitehaven.

A buyer would gain four coal-producing mines in the Gunnedah Basin of New South Wales state, and a fifth mine is expected to start production next year. The company also has enough rail and port capacity to keep up with expanding output. Whitehaven expects output to nearly double to 9 million metric tons in the year ending in June, according to a November presentation.

A takeover now would follow at least two aborted attempts since 2010, when Whitehaven put itself up for sale after receiving uninvited bids. That auction ended in May 2011 after offers failed to satisfy Whitehaven management.

Coal Outlook

Tinkler, a former electrician who became Whitehaven’s largest shareholder after the company acquired his Aston Resources Ltd., offered to buy the company in July. His A$5.20- a-share bid collapsed the following month as falling coal prices made financing the A$5.3 billion offer more difficult.

The outlook for China’s economy and coal prices have improved since Tinkler’s approach. The rising price of gas in the U.S. is dimming its appeal as an alternative for U.S. utilities that typically rely on coal as a fuel.

After a 19 percent drop in 2012 that was the steepest annual decline since 2005, power-station coal at the port of Newcastle is expected to average $98.51 a metric ton this year, analyst estimates compiled by Bloomberg show. The fuel fetched $91.10 a metric ton in the week ended Jan. 11, data from IHS McCloskey show. The week Tinkler originally made his bid, coal averaged $85.25.

The company’s progress since then, expanding its Narrabri mine and nearing production at the Maules Creek project, means Whitehaven has become a less risky bet for any buyer, said James Stewart, an analyst at CIMB Group Holdings Bhd. in Sydney.

Relative Value

Key to Whitehaven’s expansion was the installation of a so- called longwall -- a piece of machinery several hundred meters long that shears off coal underground -- at Narrabri in June.

Meanwhile, the Maules Creek mine, in an area that also produces barley, chickpeas and sorghum, won environmental approval in October after an 18-month wait. The first coal from the fully-funded project is expected in early 2014.

“They’ve got a bunch of boxes ticked,” David Cotterell, an analyst at Nomura in Sydney, said in a phone interview. “We know that people have kicked the tires before.”

Whitehaven’s valuation is making it a target, Cotterell said. At yesterday’s close in Sydney, the company’s stock price had tumbled 44 percent since last year’s peak in April, even as the value of its net assets rose. With the shares at A$3.37, Whitehaven was trading at 1.01 times book value, data compiled by Bloomberg show.

Tinkler Liquidation

That’s half the multiple it fetched in mid-June when Tinkler was preparing his bid, making Whitehaven now the cheapest Australian coal miner with a market value of more than $500 million, the data show.

Australian authorities in December applied to liquidate eight of Tinkler’s companies, including his soccer and rugby teams, to recover taxes. He lost ownership of a jet and helicopter in November over unpaid debts.

His debt struggles have led Whitehaven investors to speculate that his stake in the coal producer will be seized and offered to the market, said Andrew Pedler, an analyst at Wilson in Brisbane.

With control of Tinkler’s stake in question, even traders who consider Whitehaven to be undervalued are reluctant to buy shares, Pedler said in a phone interview.

Tinkler’s Troubles

“The idea that Tinkler’s stake may be tipped into the market is what the greedier investor is concerned with,” he said. “They might be able to get it cheaper tomorrow. That’s why they’ve been sitting out the market. Whitehaven is significantly undervalued.”

Tinkler’s 19.4 percent stake is worth A$679 million and creditors including Farallon Capital Partners, Credit Suisse Group AG and Kuok Group may seek to take control of it, three people familiar with the matter told Bloomberg News in November.

“Because of Tinkler Group’s internal issues, the speculation is constantly out there,” Haggarty, managing director of Whitehaven, said in the phone interview. “Will he have to sell his Whitehaven stock? It’s the uncertainty around Tinkler Group that’s causing the problem.”

Tinkler tried and failed to oust the chairman and four directors, including Haggarty, at Whitehaven’s annual meeting in October.

Shenhua Energy

Among several potential bidders is Shenhua Energy, China’s biggest coal producer, Patersons’ Harrington said. The Beijing- based company’s Watermark project is near rail infrastructure that accesses the port of Newcastle, the exit point for coal mined in the Gunnedah Basin.

Whitehaven said Dec. 19 that while it hadn’t received a bid from Shenhua, they had held discussions on several occasions “because of the obvious potential synergies between the assets of each company in the Gunnedah Basin.”

Yancoal, as Yanzhou Coal Mining is known, also exports through Newcastle, and buying Whitehaven would lower average production costs for the Shandong-based company, said Colin McLelland, a resources analyst at Investec in Sydney.

Zhang Baocai, Yanzhou Coal’s spokesman, and Meng Jian, a spokesman at Shenhua Group, Shenhua Energy’s parent, couldn’t be reached for comment on a potential acquisition of Whitehaven.

Another potential buyer is Xstrata Plc, the Swiss commodities trader that’s merging with Glencore International Plc, said Pedler. Xstrata declined to comment on speculation, spokeswoman Alison Flynn said.

‘Obvious Candidate’

Many of the company’s investors are holding shares that are worth less than the price at which they were bought, meaning a buyer would have to make a “materially” higher offer, said Nomura’s Cotterell.

Even so, a buyer may be able to acquire the company at a 30 percent premium to yesterday’s market value, for A$4.4 billion, said Pedler. That would still be less than Tinkler’s failed bid of A$5.3 billion last year.

Whitehaven, with funding already in place and coal production set to increase, stands out as a target among Australia’s publicly traded coal producers, Patersons’ Harrington said.

“They are really the most obvious candidate in the listed space,” he said. “It does have some uniqueness.”

To contact the reporters on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net; Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net


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