Giants Team Up for Big Takeover

07/12/2011 1:39 pm EST


Jim Jubak

Founder and Editor,

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 US coal company and the world’s largest steelmaker 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, compared to the May 2010 bid’s value of US$13.47. That’s 23% higher.

The price was about 40% above the stock’s closing price on the Sydney market yesterday, before the bid was announced. 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 already 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 an 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 therefore the bid reflects this slowdown.

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 my watch list. For my latest update on the stock, see my July 7 post.)

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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