Macarthur Coal Limited 14 Apr 10

Popularity plus at a hefty price

About the only thing that is really clear about Macarthur Coal at the moment is that the coal miner isn’t short of suitors. As Members may recall, the 2008 takeover tussle for Macarthur ended in a stalemate between China’s CITIC Resources, European steel maker ArcelorMittal and South Korean steel maker Posco.

These companies are a formidable obstacle to any new entrants, given that they hold 22.4%, 16.6% and 8.3% of Macarthur respectively. Macarthur’s three major shareholders are on the register for strategic reasons. The two steel makers are there to leverage some influence over coking coal supply and pricing. CITIC is likely motivated by China’s broader interest in commodities generally.

Prior to the 2008 wrestle for control, Xstrata had been hovering in the wings with plans to make an offer of its own for Macarthur. Xstrata’s interest has remained and the current round of bids and counter-bids has drawn them closer to making a formal offer.

The battle for Macarthur has put a rocket under the company’s share price providing Members with an opportune time to take profit.

“Given that the stock is currently trading at around 35 times its consensus 2010 earnings, Macarthur is in our view already above its fair value.”



SHARE PRICE CHARTS AND COMMENTS:

Fat Prophets initially recommended buying Macarthur Coal at $1.25 in September 2002 in the Australasian report (FAT98). Our last review of this stock for the Mining and Resources report was in January (Fat Mining 208).

Turning to the technicals, Macarthur Coal was already looking very bullish prior to the M&A announcements. Both the short and longer term up trends was firmly in place. The bullish moving average cross which occurred in June 2009 indicated momentum to favour the upside. Prior to the takeover announcement, Macarthur Coal was consolidating above major support at the 50% Fibonacci level of $11.76, which is a bullish sign and expectation of a move higher.







As with most M&A activities indicators reach overbought levels very quickly. This is evident from the relative strength index (RSI) to trade within overbought levels and volume to be enormous as depicted from the daily chart. More interesting is the fact that the most recent high of $17.17 on April 12, caps exactly at the 78.6% Fibonacci resistance level.

Looking at the broader picture, Macarthur Coal remains in a strong uptrend, as evident from the series of higher highs and higher lows, representing the strength of the trend. However, investors need be aware that the obvious surge in prices has mainly been on the back of the recent M&A activities. Caution should be exercised as prices could retrace once these takeover talks seize.







STATE OF PLAY

Before we discuss the likelihood of Xstrata throwing its hat into the ring, let’s first recap the somewhat convoluted sequence of recent events.

Firstly, just before Christmas, Macarthur moved from prey to predator with an offer to take over Gloucester Coal. Hong Kong’s Noble Group owns 87.7% of Gloucester Coal and Macarthur planned to issue scrip to Noble in consideration of this.

In associated transactions, Macarthur would also buy out Noble’s interest in Middlemount and increase its interest in Donaldson Coal, also from Noble. Additionally, Macarthur would acquire the direct interests that CITIC holds in certain of its assets.

Shareholders were due to vote on the Gloucester Coal deal and associated transactions yesterday, Monday 19 April 2010. Allowing the vote to proceed could scupper any chance of a higher formal offer coming through. If the vote is successful then Noble Group would have a 24% stake in Macarthur and pose an almost insurmountable obstacle to the other bidders.

With the vote nearing, US private coal giant Peabody Energy sought to make a move before it was too late. The company lobbed a surprise $13 bid at Macarthur in late March, which the company promptly rejected. Peabody then followed up its initial salvo with a $14 bid on April 6 2010. Management rejected this the next day and continued on its path to securing Gloucester Coal and bringing Noble onto the register.

Macarthur’s stance with regards to the revised Peabody bid seemed immediately justified when Queensland thermal coal producer New Hope threw its hat into the ring with a $14.40 scrip offer. This was the highest so far, but did not include a cash component and was again promptly rejected as insufficient by Macarthur. New Hope certainly isn’t short of cash, with around $1.8 billion following the sale of its stake in Arrow Energy, so a revised offer is a possibility.

Even with Peabody and New Hope as declared bidders and the potential for a higher offer from one of them, the shareholder vote was still set to proceed as planned. That was until the emergence of Xstrata as a potential bidder. Xstrata has not made a formal offer, but it is understood to have approached Macarthur’s three major shareholders with a proposal valued at $16 per share. As a result of this, and pressure from shareholders to provide more time to consider the New Hope offer, Management deferred the vote to Monday 19 April 2010.

The situation is as follows:

  • If the Gloucester Coal deal proceeds the likelihood of a successful bid for Macarthur by anyone other than Noble reduces. In this case we would expect Macarthur’s stock price to soften as the takeover premium is effectively removed.
  • Either Peabody or New Hope could increase their existing bids, or a third buyer may enter the fray. The potential third bidder is most obviously Xstrata at $16.

Given that Xstrata removed itself from the competition when prices went north of $16 per share in 2008, it does not seem particularly likely that Xstrata will see fit to go higher this time around. This is particularly so given that there are now around 17% more Macarthur shares following last year’s capital raising.

Although Macarthur’s stock price has pulled back somewhat from it’s high in excess of $17, it is still above Xstrata’s potential bid. Xstrata, or any of the other bidders could theoretically come in with an offer in excess of Macarthur’s stock price. Given that the stock is currently trading at around 35 times its consensus 2010 earnings, however, we find it difficult to see how a higher bidder could get the numbers to stack up.

As such, we believe the prudent course of action is to lock in the impressive gains that are currently available and sell Macarthur around $15.50.

DISCLAIMER

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