China's Yanzhou Coal on Thursday tabled a bid for Felix Resources, valuing the Brisbane-based coal miner at A$3.54 billion ($2.98 billion).
Shandong-based Yanzhou is offering Felix shareholders A$16.95 per share in cash plus a dividend of A$1.00 per share, funded primarily from Felix's cash reserves. In case Felix does not have enough cash to pay the dividend, Yanzhou has guaranteed the payment. The dividend is payable in two equal tranches with the first declared along with the offer on Thursday and payable on October 30, to all shareholders registered on the books on October 15. The record date for the second tranche is not yet decided. Shareholders will also receive a distribution of shares with a cash backing of A$0.05 per share in Felix's subsidiary South Australian Coal Corporation (SACC).
Including the dividends, the offer price of A$18 represents a 6.5% premium to Felix's last traded price of A$16.90 on the Australian Securities Exchange on Monday, when trading in Felix shares was suspended. It represents a 28.5% premium to the three-month volume weighted average price (VWAP) of Felix.
Felix shares were suspended pending news of the bid, which also had the effect of causing the share price to start rising before the suspension. However, the bid which was finally tabled on Thursday, fell somewhat short of speculation.
Felix is a coal producer with four operating mines and exploration interests in New South Wales and Queensland, with production due to start shortly at the NSW project, Moolarben, which will supply mostly thermal coal. Felix exports most of its production to Asia specifically to customers in Japan, South Korea, Taiwan, China and India. For the most recent 12-month period it sold 4.8 million metric tonnes of coal.
Felix's board of directors, including Felix's chairman Travers Duncan, managing director Brian Flannery, and non-executive director Hans Mende, who hold controlling interests in Felix, has unanimously recommended the offer to shareholders.
The deal provides "substantial funding capacity for the continued development of the Moolarben project and for future exploration and development", said Felix in its ASX filing, adding that Yanzhou intends to retain the existing employees and management of Felix as well as maintain the current workforce at Yanzhou's current Australian operations. Further, Yanzhou intends to keep Felix headquartered in Australia.
Yanzhou is majority owned by a Chinese state-owned-enterprise. It operates six coal mines in China and has a presence in Australia through a wholly owned subsidiary Yancoal Australia, which acquired the NSW-based Austar Coal Mine in early 2005. Yanzhou, which is China's fourth-largest coal producer and the largest in eastern China, has said that it will finance the bid from the A$1.8 billion of cash on its books as of June 30. It also indicated that it could seek bank debt and "has access to significant capital from Chinese institutions and has received indicative approval for a long-term credit facility to fund the remainder of the purchase price".
The deal is subject to various regulatory approvals including Australia's Foreign Investment Review Board and regulatory approvals in China as well as a vote by shareholders of both companies.
Citi and Wilson HTM are financial advisers and Allens Arthur Robinson is legal adviser to Felix. UBS is financial adviser and Corrs Chambers Westgarth is Australian legal adviser to Yanzhou.
In June, a deal by another Chinese company, China Minmetals Non-Ferrous Metals Company (Minmetals), to takeover specific assets owned by Melbourne-headquartered Oz Minerals for $1.39 billion was approved by Oz Minerals shareholders. Oz Minerals, the world's second largest producer of zinc and a substantial producer of copper, lead, gold and silver, told its shareholders quite categorically the deal was fair and provided the best available option to refinance debt. The June deal was revised by buyer and seller after the Australian Treasurer objected to Minmetals' first $2.1 billion offer to take over 100% of Oz Minerals on grounds of national security, as the properties owned by Oz Minerals included a mine located near an Australian defence testing facility. The mine was excluded from the deal when it was finally inked.
The Minmetals deal followed just days after Rio Tinto walked away from a $19.5 billion deal it struck in February with Chinese state-owned enterprise Aluminum Corporation of China (Chinalco), preferring to launch a $15.2 billion rights issue and enter a joint venture with Australian miner BHP Billiton. Sentiment in China was bruised and in Australia nationalist fervour was building against Chinese takeovers. Chinese firms have become the largest investors in Australia and the majority of natural resources M&A deals in the last year have been struck by Chinese firms.
Timing now is even more tricky. On July 5, Stern Hu, a Chinese-born Australian citizen, who is general manager of Rio Tinto's Shanghai office, alongwith three other Rio Tinto employees working in the same office were jailed in Shanghai on suspicion of espionage and stealing state secrets. Rio Tinto has sought to secure the release of its employees without creating too many waves in China, which is one of its largest customers. Last week Chinese media reported the four were being charged with trade secrets infringement and bribery, with the espionage charge dropped.
