Yanzhou Bid For Australian Unit Throws Up Questions
By Cynthia Koons and Gillian Tan
Yancoal Australia's YAL.AU +5.71% shareholders are being presented with an unexpected choice: be bought out by its Chinese parent or continue to weather a market that’s been punishing coal stocks. Even if the buyout looks like an appealing option, there are a number of questions that need to be answered before the deal gets across the line.
Yancoal Australia became a publicly listed company in June after the parent company did a $700 million backdoor listing of its Australian assets to list them on the exchange. Yancoal Australia’s shares have fallen 51% since then. The company predominantly produces thermal coal, an energy source, but the price of the commodity has been hammered by the glut of cheap U.S. gas and weaker demand for energy worldwide.
Now the Chinese parent is proposing to buy out the listed Australian entity so it can manage the unit itself, which should help lower the cost of capital for the Australian division. The move has the potential to rankle regulators though. When the Australian government allowed Yanzhou to buy Felix Resources Ltd. in 2009 — the acquisition that formed Yancoal Australia — it required the Chinese parent to list Yancoal Australia on the Australian exchange by the end of 2012 and reduce its holding in the company to less than 70%. At the moment, the Chinese parent owns around 78% of the Australian division and is offering to buy out the 22% that is floated on the exchange.
Yanzhou is offering to retain an Australian listing by offering Australian shareholders stock in the parent company, but it’s unclear if that’s in keeping with the agreement Yangzhou reached with regulators just a few years ago.
“We wonder if the approving bodies in Australia will be happy that the letter of the law but perhaps not the spirit of the law has been met,” Paterson Securities resources analyst Andrew Harrington said in a note to clients, adding it’s uncommon for a foreign company to retain an Australian listing but not complex to approve.
The Australian government also required, in approving the 2009 merger, that Yancoal Australia would be incorporated and headquartered in Australia with a predominantly Australian management and sales team. Yancoal Australia said in a statement that the deal is contingent on regulatory approval in Australia and China.
Of course times have changed since 2009, when the commodities boom was driving a wave of consolidation in Australia’s coal industry. Yancoal Australia is now one of just a handful of large-scale, publicly listed coal producers in Australia and its shares are struggling. It is sitting on a large debt burden at around $4 billion, compared to a market cap of $736 million. Rivals Whitehaven Coal WHC.AU -1.79% and New Hope Corp. NHC.AU +0.83% shares are down 37.6% and 13.3% since the start of the year, compared to a 26% decline for Yancoal.
—Reuters That raises another question – will Yancoal’s Australian investors be happy with the share price at which Yanzhou is offering to buy them out? The Chinese parent said the Australian shareholders will receive 0.91 CHESS depositary interests, or Australian-listed shares in the Chinese parent, which it says is a 30% premium to the volume weighted average price of Yancoal Australia’s shares over the 60 days to July 5.
“You’d think to get it done, Yanzhou will have to improve terms, and the share price is reflecting that,” Fortitude Capital chief investment officer John Corr told MoneyBeat. In afternoon trade Tuesday, Yancoal Australia’s stock was just 5.7% higher at A$0.74, indicating shareholder uncertainty as to whether the proposed deal will get done at the current price.
Mr. Corr’s firm holds Yancoal Australia’s contingent value rights, or CVR shares, which are convertible into Yancoal’s ordinary shares by the end of this year.
Lazard Inc. LAZ +1.25% and Blackstone Advisory Partners BX -1.11% are advising Yancoal Australia’s independent directors, while Citigroup Inc. C +2.04% is advising Yanzhou.
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