Concerns that a A$3.54 billion takeover offer by China's Yanzhou
Coal Mining Co. Ltd. (1171.HK) for Felix Resources Ltd. (FLX.AU)
could stumble upon political and regulatory hurdles contained
investors' enthusiasm for the deal Friday.
Felix shares Friday traded below Yanzhou's offer price while
Yanzhou shares narrowed early gains as investors weighed the
chances of Australian government approval of the deal.
If successful, the transaction would be the biggest Chinese
takeover of an Australian company to date, but the deal, announced
Thursday, must first win approval from Australia's Foreign
Investment Review Board, or FIRB, at a time Chinese investment in
Australia has become a politically charged issue.
Shareholder approval is unlikely to be a stumbling block with
directors who control 49% of the stock backing the deal, subject to
a higher offer emerging. Chances of a rival bid also appear low
although several potential counter-bidders were being canvassed by
the market Friday.
Felix resumed trade Friday and closed up 4.1% at A$17.60 a
share, below the A$18 Yanzhou is offering, in a broader Australian
market that climbed 0.6%.
Analysts said this partly reflected the fact that A$1 of the
offer will be delayed as a special dividend to be paid in October,
but was still largely due to the political risks surrounding the
deal.
ABN Amro analyst Tom Sartor said the offer was at a significant
premium to his valuation of the stock at A$12 a share and that
shareholder approval looked guaranteed.
Sartor said he could not see any strategic or national interest
issues that would give the Australian Government reason to scuttle
the deal, but that recent developments in relations between the two
countries were creating market uncertainty.
"We believe the deal warrants FIRB approval, however market
perception of this being a potential stumbling block in relation to
strained Australia-China iron ore trade relations and foreign
investment decisions may see nervous investors selling under the
implied terms," he said.
Relations between Australia and China have been strained by the
arrest of four Rio Tinto Ltd. (RP) employees as well as Rio's
decision to abandon a US$19.5 billion deal with Aluminum Corp. of
China and this year's heated round of annual iron ore price
talks.
Australian Resources and Energy Minister Martin Ferguson said he
could not comment on individual cases, but that Australia remains
open to Chinese investment.
"Australia has a long history of welcoming foreign investment
and it is encouraging to see continued interest in Australian
resource development by companies from China and elsewhere around
the world," he said.
A spokesman for Australian Treasurer Wayne Swan declined to
comment on the Yanzhou bid.
A Felix spokesman declined to comment on the prospects of the
deal winning regulatory approval.
Acquisition Looks "Expensive" For Yanzhou
"It's hard to say whether the deal will succeed" given the
regulatory hurdles, said Shanghai-based Citic Securities analyst
Wang Ye.
Yanzhou ended up 2.3% at HK$12.40 in Hong Kong, retreating from
a high of HK$13.00 early in the session. The stock ended up 3.7% in
Shanghai at CNY20.72, also narrowing from an earlier 10% jump.
Credit Suisse said in a note Friday that the Felix acquisition
"looks expensive on all fronts," with Yanzhou paying a price that
equates to 22 times forecast 2010 earnings, which is a 15% premium
over what other global coal producers are currently trading.
However, the investment bank said the acquisition will help
boost Yanzhou's future earnings growth, and expects the deal to
boost the company's net profit by 14% in 2010 and by 37% in 2011.
Analysts said they see limited further upside for Yanzhou in the
near term, even as the latest acquisition, if successful, will
significantly boost Yanzhou's coal output, with some forecasting a
40% rise in its output by 2012.
Investors' views on the Yanzhou price effectively boil down to
whether or not they believe Felix's Moolarben thermal coal
development in New South Wales state can deliver all of the upside
the company has promised.
UBS analysts said their valuation of the stock was A$15 a share,
based on a more conservative ramp up of Moolarben than Felix has
flagged.
They said that applying Felix's promised ramp up of the mine
would boost that valuation to A$21.61 a share.
Yanzhou spokeswoman Tina Law declined to comment on the value of
the offer and the approval processes.
Rival Bidders Canvassed By Market
Speculation has already begun about potential rival bidders for
Felix, although with the coal miner having been in play for a year,
some argue the chances of a rival bid now are low, and this view
appears to be reflected in the share price reaction.
Felix first revealed that it had received takeover approaches in
July last year and has been in halting talks with a number of
parties since.
Xstrata PLC (XTA.LN) is being tipped by some as a possible
counter bidder, as it has the Ulan mine adjacent to Felix's
Moolarben project and has been in and out of court with Felix on
issues relating to the mine for years.
Credit Suisse said Xstrata could extract synergies of around
US$25 million a year from Felix and would also benefit from access
to Felix's stake in the Newcastle Coal Infrastructure Group port
development.
Xstrata wasn't immediately available for comment.
Other companies being canvassed as possible counter-bidders are
Noble Group Ltd. (N21.SG), Vale (RIO) and Peabody Energy Corp.
(BTU). A Peabody spokeswoman in Australia wasn't immediately
available for comment. Noble declined to comment and Vale couldn't
be reached for comment.
Merrill Lynch said the Yanzhou offer represented fair value but
that a superior offer could not be ruled out.
However, one person familiar with the situation said most of the
players being talked about have been through Felix's data room over
the past year and have not tabled bids.
-By Alex Wilson, Dow Jones Newswires; 61-3-9292-2094;
alex.wilson@dowjones.com
(Rachel Pannett in Canberra and Elisabeth Behrmann in Sydney
contributed to this story)
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