re: fin review coal article Street TalkAuthor: Edited by Anthony...

re: fin review coal article Street Talk
Author: Edited by Anthony Hughes ([email protected]) with Stewart Oldfield
Date: 22/02/2005
Words: 1799
Source: AFR
Publication: Australian Financial Review
Section: Market Wrap
Page: 20


Coal merger good for both parties
Centennial Coal's planned scrip takeover for Austral Coal, to be announced tomorrow, won't involve much of a takeover premium for the target but it at least solves some of Austral's pressing problems with its Tahmoor mine, south-west of Sydney.

The coking-coal mine, Austral's sole asset, has been giving the company's bankers, ANZ, some sleepless nights. This has prompted Austral to explore the prospect of selling 25 per cent of the mine.

This isn't something that appeals to Centennial, but merging with Austral gives Centennial access to the soaring coking-coal export market (most of Centennial's coal production is thermal coal and is used domestically). The merger also allows it to apply its expertise in longwall mining, which has so plagued Austral.

Austral is likely to be valued at about $300 million on a fully diluted basis, and the combined entity should be able join the top 100 listed companies with a market value of more than $1 billion.

Austral shareholders holding on to Centennial scrip will get the chance to be part of a more diversified coal-mining entity that will be able to service Austral's debts.

Austral's market value has been discounted during the Chinese-inspired coal boom because of its operational history and its single-asset exposure. Simply put, a Centennial merger will enable the company to address both of these issues.

It is understood that Wilson HTM is advising the target and Gresham Partners the bidder, and it appears to be a friendly transaction.

Analysts estimate that Austral will make a profit of about $100 million in 2005-06, against $90 million for Centennial, so Centennial boss Bob Cameron is locking in a big potential return for taking on the Tahmoor risk. If Austral's earnings are re-rated to Centennial's multiple, there may be upside of about 50 per cent for both companies' shareholders.