Peabody Energy makes another run at MacArthur Coal and its supply of coal for making steel

07/12/2011 12:42 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The big boys are back. A little more than a year after MacArthur Coal (MCC.AU in Sydney and MACDY in New York) rejected a A$15.00 a share bid from Peabody Energy (BTU) and three years after the company ended acquisition talks with ArcelorMittal (MT), the biggest U.S. coal company and the world’s largest steel maker have teamed up on a A$15.50 bid for the Australian coal producer.

Thanks to a stronger Australian dollar this year’s bid is worth about US$16.59 a share versus a May 2010 value of U.S.$13.47. That’s a 23% higher price than the last time around.

The price was about 40% above the close on the Sydney market today before the bid was announced. The shares were up a little more than 27% in New York trading. Today the Sydney shares are playing catch up and have climbed 37%.

ArcelorMittal owns about 15% of MacArthur. China’s Citic Group and South Korea’s Posco own 23% of the Australian miner between them.

MacArthur is the largest exporter of metallurgical coal used by steelmakers. The company has total coal reserves of 270 million tons and total coal resources estimated at 2.3 billion tons.

Peabody and ArcelorMittal are making the bid through a joint venture 60% owned by Peabody and 40% owned by ArcelorMittal.

It’s hard for me to see another bid emerging given the history among these companies and the stakes owned by ArcelorMittal and Citic Group and Posco. So I think the decision is likely to be and up or down vote by MacArthur’s board.

The price, you could argue, isn’t especially generous at 8.7 times MacArthur’s projected EBITDA (earnings before interest, taxes, depreciation, and amortization). That compares to an EBITDA multiple of 15 for takeovers of Australian coal producers in 2010, according to Bloomberg. Or you could argue that coal prices are near a peak—or at least won’t see the same appreciation that they have seen in the last 12 months—and that therefore the reflects that past appreciation and the likely slower rate of appreciation over the next twelve months. My guess is that the MacArthur board will take the deal this time around. I’d sell if the shares get to near the bid price.

I think the deal is a good one for Peabody since it extends the company’s position in Australian coal production and increases its exposure to metallurgical coal. Peabody Energy is a member of Jim’s Watchlist. For my latest update on the stock see my July 7 post http://jubakpicks.com/2011/07/07/id-wait-just-a-little-longer-on-watch-listed-peabody-energy-btu/ )

Full disclosure: I do not own shares of any stock mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of MacArthur Coal as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

 

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