re: Ann: Response to Peabody's Further Pr...
Peabody Acquisition Bid Bites the Dust.
By Christopher Barker May 18, 2010 |
Pulling off perhaps the most remarkable feat in the history of stage and screen, Linda Blair dazzled audiences by spinning her head full-circle 'round while portraying poor, possessed Regan in The Exorcist.
OK, maybe some old-school special effects were involved, but one company might really know what it feels like. Peabody Energy (NYSE: BTU) has tried to keep its gaze fixed upon its Australian acquisition target Macarthur Coal over the past several weeks, even as the investment landscape for Australian coal mining has revolved upon its axis.
With the Australian government standing by its controversial proposal to enact a 40% super-profits tax upon the earnings of resource producers down under, Peabody abruptly retreated from its prior bid down to a $3.3 billion offer. After Macarthur announced last week the abandonment of a separate deal to acquire Gloucester Coal -- an explicit prerequisite of the Peabody offer -- the available signals suggested some hope for Peabody's revised bid. Just days later, however, the deal is now dead in its tracks.
As I have pointed out, the challenge to this deal all along has been for Peabody to placate the interests of Macarthur's three principal stakeholders: China's Citic Resource Holdings (which holds a huge 22.4% stake) and mega-steelmakers ArcelorMittal (NYSE: MT) and POSCO (NYSE: PKX).
Conveying particular opposition from Citic on the basis that the offer stands well below the "long-term strategic value" of the underlying assets, Macarthur Coal opted not to proceed with a shareholder vote. Appearing to acknowledge the core source of opposition to the deal, Peabody responded that it was "unfortunate that one shareholder could block a proposal that would have created significant value for all."
Given the incredible lengths to which both public and private sector entities in China have gone to secure access to (and investments in) strategic resources, I believe that these moves were envisioned with a far longer time horizon than Peabody's proposal would have yielded.
On the other hand, Peabody included within its offer an avenue for each of the three stakeholders to maintain their equity interest in the Macarthur assets, so it's not as though they would have been locked out of the long-term earnings potential of the assets. Still, with leading producers BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RTP) holding the cards with respect to product pricing negotiations, major importers like China have a natural vested interest in minimizing the pace of consolidation among foreign miners.
To finally exorcise the acquisitive fever that the miner has caught now that Pan-Asian demand for seaborne coking coal and thermal coal has kicked into high gear, Peabody Energy may be well-advised to focus elsewhere in the Pacific basin (where 40% profit taxes are not on the political agenda). If the proposed tax passes, China's growth rate falters somewhat, or any number of scenarios conspire to fuel the ongoing near-term dip in the relevant resource sectors, then Peabody may ultimately find a more sweetly priced target for its acquisitive zeal.
