Gloucester Coal and Yancoal Australia may get hitched after all

Gloucester Coal is recommending that its shareholders approve a merger with China’s state-owned Yancoal Australia, despite a smaller cash payment than first offered.

The Australian arm of Yanzhou Coal will contribute roughly A$300 million ($320 million) less debt to the newly created company, which would become the biggest independent coal producer in Australia. The modifications to the terms of the deal that was first announced in December reflect revised debt calculations, the Australian coal company said in a statement.

The reduced debt was due to a fall in the Australian dollar value of Yancoal’s US dollar debt as well as Gloucester’s half-year reported increased net debt of $379 million.

Gloucester shareholders will now get a smaller cash payment — $639 million instead of $700 million. So, instead of getting $3.20 a share, Gloucester shareholders will get $3.15 a share. Of that, $0.44 a share will be paid through a special dividend, down from the $0.56 a share announced in December.

The new terms still are subject to an independent expert’s report and approval from the Foreign Investment Review Board — which is never a given.

Gloucester shareholders will own 22% of Yancoal if the deal is approved (rather than the 23% previously forecast) and Yanzhou Coal will own 78%, making it the biggest investment by a Chinese state-owned company in the nation’s coal industry. Plans call for listing the new entity on the Australian Securities Exchange.

Gloucester Coal, which is a coking and thermal coal producer with operations in New South Wales and Queensland, is partly owned by Singapore-listed commodity trader Noble Group, which in turn will own about 13.2% of Yancoal and will receive A$412 million in cash under the terms of the merger. William Randall, director of Noble Group and head of hard commodities, will join the board of Yancoal as a director.

Noble Group announced yesterday that it will vote all its shares in Gloucester in favour of the proposed merger, and it will elect to receive all ordinary shares in Yancoal.

“We are very pleased that Gloucester and Yancoal have reached this important milestone in the creation of a world-class mining company. Creation of scale and flexibility is increasingly important in commodity production. Yancoal will have a multi-product, multi-mine operation of scale, which is extremely well positioned to deliver value to shareholders. We look forward to supporting our investments in the Australian coal sector,” Noble Group chairman Richard Elman said in a statement.

“The Gloucester board unanimously believes shareholders should support the proposal as it provides an opportunity to participate in the benefits of creating a world class coal producer, and separately, the opportunity to receive cash payments of $3.15 per share in the form of a special dividend and capital return,” added Gloucester’s chairman James MacKenzie in another statement.

Citi and UBS are advising Yanzhou, and Lazard is advising Gloucester.