Coal, News & Features, Resource News

Noble discovers that juggling hot coal is a tough ask

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By Bryan Frith

NOBLE Group probably now regrets making a bid for Gloucester.

It appears to be finding that stitching together what is effectively an IPO of Gloucester Coal at the same time that it is seeking to privatise the coalminer is no easy task.

Noble already owns 87.7 per cent of Gloucester and has a $139 million cash takeover bid open which is seeking to mop up the remaining 12.3 per cent at $12.60 a share and would result in taking Gloucester private.

However, Gloucester has also made it known that it is also exploring an alternative with Noble which would involve acquiring other assets from Noble, and is expected to include a significant equity raising.

That was 11 weeks ago and a proposal is yet to surface.

Gloucester directors have recommended that shareholders accept the Noble offer in the absence of a superior proposal but have suggested that shareholders may wish to wait until close to the end of the offer period to see whether a proposal has been agreed with Noble, and therefore whether they wish to remain a shareholder to participate in the expanded Gloucester. In the absence of the Noble offer, or an alternative transaction, Gloucester’s share price would be likely to fall considerably.

On Wednesday, Noble extended its offer by a further month to September 3. Because the offer has now been extended by more than one month, those holders who have accepted now have the right to withdraw their acceptances if they wish.

Noble has been picking up acceptances and at last count held a relevant interest of 92.54 per cent, which means it has acceptances for 4.84 per cent of the capital, or almost 40 per cent of the outstanding shares.

But it’s still well short of being able to enforce compulsory acquisition. As an existing shareholder, there is a dual test for Noble. It must not only obtain a relevant interest of at least 90 per cent but must also secure at least 75 per cent of the shares it doesn’t already own. That would require acceptances for at least 9.2 per cent of the outstanding 12.3 per cent, which when added to its existing 87.7 per cent would take the compulsory acquisition trigger to 96.93 per cent. That’s a very high ask; in any case, it appears Noble is not anxious to fully own Gloucester, because it has said that, if it cannot agree on an asset sale to Gloucester, a further option is to simply keep Gloucester listed and use it as vehicle to acquire other Australian coal assets.

Noble’s Australian coal assets, apart from its stake in Gloucester, are a 30 per cent stake in the Middlemount Coal joint venture, plus an option to acquire a further 20 per cent for $100m, and 100 per cent of Donaldson Coal.

It’s believed Noble has indicated to Macarthur that it intends to exercise its option to lift its Middlemount stake but is in no hurry to do so, because it would then have to fund 50 per cent of the mine’s development cost. So long as it retains its existing stake Macarthur has to foot 70 per cent of the bill.

Gloucester is in the midst of an expansion program which will result in the majority of its output being metallurgical coking coal. Middlemount is a joint venture with Macarthur Coal and is under development, aiming to produce at the rate of 1.8 million tonnes per annum in the second half of 2011 and subsequently increase to 5 million tonnes per annum.

Donaldson is a thermal coal producer and, as there are different dynamics for the coking and thermal coal markets, is not likely to be part of the deal under negotiation between Gloucester and Noble.

If Gloucester and Noble can now agree on a deal it’s likely to involve a large equity raising to not only fund the acquisition of the Middlemount stake but to also provide cash to enable Gloucester to consider expansion through further acquisitions.

There would be a need to reintroduce a slew of institutional shareholders, through a placement, to ensure a sufficient free float and market liquidity, which would give it the character of an IPO.

In hindsight, the mop-up bid for Gloucester appears to have been an impetuous decision which was made when Macarthur Coal — which had agreed to acquire Gloucester and Noble’s Middlemount stake, giving Noble 25 per cent of the merged entity — began to consider a rival proposal from Peabody Energy. Ultimately neither of those went ahead.

Having announced a bid, Noble was required to proceed — but it probably now regrets making a bid. Certainly the deal it now wants to do with Gloucester would be a lot easier if it wasn’t complicated by the takeover bid.

Because Noble is already a substantial shareholder, any acquisition of Noble assets will require the approval of Gloucester shareholders under the ASX listing rules and perhaps the related party transaction provisions of the Corporations Act. It would also require an independent expert’s report to opine as to whether the proposal is fair to the shareholders, other than Noble.

There also a list rule which prohibits target companies from issuing shares within three months of the announcement of a bid, but that deadline has already passed. However, Noble’s bid is conditional upon no prescribed occurrences, and one of those occurrences is the issue of any shares by the target. Noble would have to either waive that prescribed occurrence or undertake that it wouldn’t rely on the issue of shares pursuant to an agreed transaction as a breach of the condition.

It’s thought that Noble would like to retain majority ownership of Gloucester. At present there are almost 82 million shares on issue, of which Noble owns almost 72 million.

Pricing any new issue will not be easy as Gloucester hasn’t had an undisturbed share price for several months. First there was the long-running Macarthur proposal, which was first announced last December, and then Noble’s takeover bid.

Gloucester shares last sold at $12.46 but in the absence of a bid would fall. The independent expert for the bid valued Gloucester shares in a range of $11 to $12 but that included a control premium.

On the other hand, coal prices have strengthened since then. While equity markets are still volatile, the strong outlook for coal and the fact that takeovers have reduced the number of players have meant there are few listed stocks for institutions to invest in. That situation will be exacerbated if Thailand’s Banpu obtains foreign investment approval to acquire Centennial Coal.

Back of the envelope sums would suggest that the issue of around 60 million new shares would give Noble about 51 per cent of the capital. At, say, $10 a share, that would raise $600m and would give Gloucester a market capitalisation of more than $1.6 billion.