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Yanzhou Coal Agrees To Buy Gloucester In A$2.1b Deal
Perspective | 30 December 2011

Yanzhou Coal Mining Company, China’s fourth-biggest coal producer, agreed to buy Gloucester Coal for A$2.1 billion (US$2.13 billion) in cash and shares to gain more mines and port access in Australia.

The deal values Gloucester at as much as A$10.16 a share, subject to some conditions, Sue Cato, an outside spokeswoman for the Sydney-based company, said on 23 December by phone. That is 45% more than its 19 December close, the day before the stock was halted.

Buying Gloucester, controlled by commodity trader Noble Group, will almost double Yanzhou’s coal mines in Australia, the world’s biggest exporter, as well as expand its access to ports. The proposed deal looked more expensive than recent industry transactions, Nomura Holdings Incorporated said in a report before the deal announcement.

“The deal is not cheap on the coal assets alone, but may be fair in view of the strategically important port capacity that Gloucester owns,” Helen Lau, Hong Kong-based analyst at UOB-Kay Hian commented on the deal reported 19 December. “Yanzhou Coal could choose to maintain or expand the facilities in the future depending on its production growth and needs for export.”

Under the plan, Gloucester will merge with Yancoal Australia and its shareholders will get A$3.20 cash and own 23% of the new combined company, which will trade in Sydney. Parent Yanzhou will own the remaining 77%.

Rising Demand

Rising demand for coal in China and India has pushed deals globally to a record US$35 billion in 2011, compared with US$30.3 billion in 2010, according to data compiled by Bloomberg. Yanzhou Coal, which bought Felix Resources for A$3.1 billion in 2009 in China’s biggest takeover of an Australian company, agreed in September to acquire two coal units of Wesfarmers for A$296.8 million.

Noble has stated to Gloucester’s independent directors that it intends to vote in favour of the proposal, subject to approval by its board of directors, Gloucester said in the statement.

Producers are seeking to expand as demand from power utilities and steelmakers rises, while asset prices drop. Global consumption of the fuel is projected to climb by an annual 2.8% in the six years to 2016, driven by China’s economic growth, the International Energy Agency said in December 2011.

Yancoal Australia will fold about US$2.7 billion in debt maturing in 2014, 2017 and 2018 into the merged company, Gloucester said in the statement.

Conditional Deal

The deal is conditional on the combined company obtaining a listing on the Australian stock exchange, according to the statement.

Yancoal Australia is required to list at least 30% of its local assets by the end of 2012 as part of conditions attached to its takeover of Felix Resources.
“Upon completion of the merger proposal we will have made a significant step toward meeting all the undertakings including a listing of Yancoal core assets,” Yanzhou said in a statement 22 December.

Yanzhou is advised by Citigroup Incorporated, UBS and Goldman Sachs (Asia) LLC, as well as by law firms Freehills, Baker & McKenzie and King & Wood. Gloucester is advised by Lazard and Noble by Blackstone Group LP.

Yancoal Expansion

Yanzhou plans to boost annual output there to about 30 million metric tons from about 16 million tons in the next five years to help meet growing demand from China, UBS AG said in a 20 December note, citing an investor presentation.

Yancoal may spend more than US$1 billion buying mines in Australia, Murray Bailey, managing director of the unit, said in a September interview. Yancoal had net income of A$415 million for the year to 31 December 2010 and debt of A$3.3 billion, according to a statement on its website.

Noble, a Singapore-listed commodities supplier, owns 64.5% of Gloucester, according to data compiled by Bloomberg. Noble, whose main business involves trading and shipping bulk commodities including coal, took control of the company in 2009 when it offered A$7 a share. Chief executive officer Ricardo Leiman quit in November after Noble reported a quarterly loss.

Yanzhou in December proposed selling as much as Rmb15 billion (US$2.2 billion) in bonds over three years. Buying Gloucester would be Yanzhou’s fourth acquisition in Australia following the Felix takeover, the purchase of coal developer Syntech Resources for A$202.5 million in August and the two units of Wesfarmers.

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