Yanzhou Coal to Buy Gloucester for $2.1B

By Elisabeth Behrmann and Cathy Chan - Dec 23, 2011 10:09 AM GMT+0700

Yanzhou Coal Mining Co. (1171), China’s fourth-biggest coal producer, agreed to buy Gloucester Coal Ltd. for about A$2.1 billion ($2.1 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 conditions, according to a statement from the Sydney- based company. That’s 45 percent more than its Dec. 19 close, the day before the stock was halted.

Buying Gloucester, controlled by commodity trader Noble Group Ltd. (NOBL), 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 Inc. said in a report before the deal announcement.

“There is an overall premium to recent share prices and I think the market has captured a good proportion of that,” Lawrence Grech, a resources analyst at Austock Group Ltd. in Melbourne, said by phone. “There is an indication of value which Yanzhou is obviously signaling but the benefits of that are more than 18 months into the future.”

Under the plan, Gloucester will merge with Yancoal Australia Ltd. and its shareholders will get A$3.20 cash and 23 percent of the stock in a new company that combines most of Yanzhou’s Australian assets with Gloucester’s. The remaining stake in the company will be held by Yanzhou and it will become publicly traded in Australia.

Yanzhou also offered a payment of as much as A$3 a share should stock in the new company drop below A$6.96 in the 18 months after the deal closes, according to the statement.

Merger Ratio

“The value of the deal all comes down to what you value the Yancoal assets in Australia at,” James Stewart, resources analyst at CLSA Asia-Pacific Markets in Sydney said by phone. “To me the merger ratio looks about right.”

Gloucester Coal rose 20 percent to A$8.41 at 1:45 p.m. in Sydney. Yanzhou climbed 6.8 percent in Hong Kong, and Singapore- listed Noble advanced 0.4 percent. The deal needs regulatory approval in China and Australia.

Rising demand for coal in China and India has pushed deals globally to a record $35 billion this year, compared with $30.3 billion last year, according to data compiled by Bloomberg. Yanzhou, which bought Felix Resources Ltd. 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 Ltd. for A$296.8 million.

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

Coal Consumption

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

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

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

Yancoal is required to list at least 30 percent of its local assets by the end of 2012 as part of conditions attached to its takeover of Felix Resources.

Australian Listing

“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 yesterday.

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

Yancoal and Gloucester plan to boost annual output to about 25 million metric tons by 2016, Yancoal said in a presentation on its website.

Noble, a Singapore-listed commodities supplier, owns 64.5 percent 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 last month after Noble reported a quarterly loss.

Buying Gloucester will be Yanzhou’s fourth acquisition in Australia following the Felix takeover, the purchase of coal developer Syntech Resources Pty for A$202.5 million in August and the two units of Wesfarmers.

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Cathy Chan in Hong Kong at kchan14@bloomberg.net

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