August 17,2009

Yanzhou's Friendly Takeover of Felix

By CT Johnson

Just one day after making its $3 billion bid for Australian coal miner Felix Resources, China's Yanzhou Coal Mining Company received the endorsement of Felix's board and management, paving the way for China's largest ever acquisition of an Australian natural resources company.  The friendliness of the transaction stands in marked contrast with the ongoing diplomatic tensions between China and Australia over four detained Rio Tinto employees.

"The Yanzhou offer allows shareholders to benefit from the certainty of cash consideration which fully values Felix, without taking on the risks associated with Felix's next phase of growth," said Felix Chairman Travers Duncan of the deal.

Yanzhou shares rose on the news Friday, up 3.6% during morning trading in Hong Kong.  Felix shares also traded higher, climbing 4.9% on the Australian Stock Exchange.

Yanzhou's bid, which totals $2.95 billion, includes an offer of A$16.95 per share, a dividend of A$1.00 per share, and a stock-based distribution worth A$0.05 per share in Felix subsidiary South Australian Coal Company.  The total offer value of A$18.00 per share represents a 6.5% premium over Felix's last listed price of A$16.90.

The offer from Yanzhou  is still subject to regulatory approval by Australia's Foreign Investment Review Board. 

Market analysts applauded the deal.  "We view the acquisition positive to Yanzhou, as the company puts excess cash to use," Credit Suisse Group  said in a report Friday. "We estimate the proposed acquisition to boost earnings by 14 percent for 2010 earnings, and 37 percent by 2011 earnings."

Not everyone is happy to see another significant piece of Australia's resource sector come under Chinese control.  "You know the Chinese will be gaining control of one of the few remaining independent coal producers within Australia," said Gavin Wendt of the equities research firm Fat Prophets.  "I mean the Australian coal scene is dominated by five big players. You know there aren't too many small independent players and I think for this very reason the Foreign Investment Review Board is going to take a very close look at this particular deal."

The coal-producer's offer drew immediate comparisons with Chinalco's failed bid to increase its stake in Rio Tinto earlier this year.  In June, Rio abruptly ended months of discussions with Chinalco about a $19.5 billion investment into the debt-laden Australian mining giant, opting instead for a rights offering and iron-ore joint venture with hated rival BHP Billiton.  Chinese observers were livid about Rio's sudden about-face, calling the company "perfidious" and likening Rio's actions to that of an unfaithful spouse.  Only a month later, four Rio employees working in China were arrested on charges of spying, causing a diplomatic rift between China and Australia. 

Yanzhou, China's fourth-largest coal miner, produces thermal coal used in power generation and metallurgical coal used in steelmaking.  The company already has small investments in Australia with the Austar mine and Southland colliery in the Hunter Valley in NSW.

Yanzhou's offer is the latest in a string of bids by Chinese companies for Australian resource producers, including Minmetals Nonferrous Metals Company's A$1.7 billion purchase of Oz Minerals and Sinochem's bid for chemical maker Nufarm.



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