Chinese miner Yancoal’s ambitious bid for Rio Tinto coal assets in the Hunter Valley has suffered a major setback, following the surprise announcement of a rival offer from Anglo-Swiss heavyweight Glencore.
The Glencore offer of US$2.55 billion for Rio Tinto’s Coal & Allied unit, which includes mines in the Hunter and a major stake in Newcastle Port, trumps Yancoal’s bid by $100 million. And crucially, Glencore have the cash.
Glencore global coal chief Peter Freyberg was at Rio’s headquarters in Montreal last night, setting out what his firm argues is a financially “superior bid”.
Throughout the bidding process, analysts have been sceptical of Yancoal’s ability to fund the acquisition. The miner, which is majority owned by Chinese state-controlled Yanzhou Coal, enters the deal with five times as much debt as comparable companies and has not reported a profit since 2012.
China is cracking down on what officials describe as “irrational” expensive foreign acquisitions. Parent company Yanzhou, which is also heavily burdened by debt, has promised only US$1 billion to finance the deal. This leaves Yancoal with US$1.45 billion to raise in the equity markets. Its second biggest shareholder, Noble Group, is unlikely to be of much help, given ongoing liquidity problems and a recent ratings downgrade. Barclays analysts say this leaves a “question mark” over Yancoal’s funding.
Glencore by contrast “presents certainty of funding” according to Barclays. Unlike Yancoal, the company is healthily in profit and is on course to pay investors US$1 billion in dividends this year. This means it has the ability to pay in cash, part-funded by divesting other assets.
Industry experts have also suggested that the Swiss giant is the more “natural fit” as far as the Rio assets are concerned. Rio’s Coal & Allied mines are located adjacent to two of Glencore’s existing Hunter Valley operations with three others close by. UBS analyst Myles Allsop says this would provide “unique synergies” for Glencore, with potential for shared maintenance, equipment and mine sequencing.
Peter O’Connor, a former Rio man and Australian mining equities specialist told Sky this week that Yancoal should really be considered a “potential consumer” of coal rather than a producer, given its close ties to the Chinese state. He noted that consumer acquisitions of these kinds of assets are “not necessarily conducive to returns for the industry”. “As a player in this industry, I’d like to see another peer buy the asset and not a potential consumer”, O’Connor said.
In addition to the financial attractiveness of the Glencore offer, it has been suggested that the Rio Tinto board will also be looking at regulatory approvals. To complete the deal, Glencore will need to gain clearance from both the Australian Competition & Consumer Commission (ACCC) and the Chinese Ministry of Commerce (MOFCOM). However, this won’t be the first time that Glencore has sought regulatory approval in China. MOFCOM, the Chinese anti-trust regulator, previously approved Glencore’s takeover of Xstrata, a deal which was vastly bigger in scope.
MOFCOM will likely also take China’s strategic need for security of coal supply into account. However, analysis shows that Hunter Valley coal exports to China are tiny in comparison to domestic production. Last year China produced 3.34 billion tonnes of thermal coal and imported 190 million tonnes. Just 20 million tonnes came from the Hunter Valley. Additionally, to alieviate any competition concerns Glencore has pre-emptively offered to sell up to 50 percent of the Coal & Allied assets if it is successful in the bid.
Yancoal continues to insist that the deal is in the bag, but a sign of Glencore’s confidence is that, unlike Yancoal, it has not included a termination right in its offer. Rio Tinto will be carefully weighing the risk of having to start at square one after years of negotiations if Yancoal fails to raise enough money and has to walk away from the deal.
Rio Tinto is expected to announce its preferred bidder next week. Rio’s board now have a clear choice: between Glencore’s new fully-funded cash offer, or Yancoal, which is further along the regulatory path but may struggle to find the money.