Gloucester Takeover - Good Deal for Noble?
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23 Dec 09
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Yesterday, Noble Group announced that Macarthur Coal proposal to buy Noble's 87.7% owned Gloucester Coal. If the deal which includes Noble’s stake in Gloucester (88%), Middlemount (24%) and Donaldson (80%) is sealed, Noble will get approximately 24% stake in Macarthur and A$175m in cash. In a note published this morning, Macquarie Research Equities (MRE) analyses the proposed deal and makes the following observations…
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Yesterday, Noble Group announced that Macarthur Coal proposal to buy Noble's 87.7% owned Gloucester Coal. Macarthur will offer Gloucester's shareholders 0.84 of Macarthur shares for every 1 Gloucester share, implying an offer price of A$8.16 per Gloucester share. Macarthur has also made an all cash alternative to Gloucester’s shareholders at A$8.00 per share. If the deal, which includes Noble’s stake in Gloucester (88%), Middlemount (24%) and Donaldson (80%) is sealed, Noble will get approximately 24% stake in Macarthur and A$175m in cash.
MRE sees this positively as it consolidates Noble's varied coal assets in Australia in one stroke, leaving it with a large stake in a visible listed entity.
Proposed price for Gloucester is 14% higher. Macarthur will acquire Noble's stake in Gloucester (88%), Middlemount (24%) & Donaldson (80%, raised from 68% prior) with Noble ending up with 24% of Macarthur. Citic Group is currently the single largest shareholder of Macarthur with a 22% stake. Macarthur's bid values Gloucester at A$8.16 a share (or cash of A$8.00 a share for minorities who elect cash). The proposed price for Gloucester is A$1 (or 14% higher) than Noble's own takeover offer for Gloucester concluded about 6 months ago (which took its stake from 20% prior to 88%).
Consolidation, not a sell-down. Noble is not selling down its effective stake in these assets though future marketing fees for Middlemount and Donaldson's output has been reduced (accounts for part of the A$175m in cash and 22.5m Macarthur shares as compensation). Rather, MRE sees this as a consolidative move with a strategic twist as Noble ends up as the single-largest shareholder (though not controlling) at Macarthur. From material posted by Macarthur, the enlarged Macarthur group will be diversified over six mines over three coal basins, with about 7.5mt of coal output for 2009(pro forma), with about 50% as thermal output.
Marketing rights remain. Noble will retain marketing rights for Donaldson & Middlemount (albeit with lower fees) which will help it drive volume at its core energy segment. Energy segment volumes accounted for 38% of total volumes for 3Q09.
Stronger balance sheet. Noble's balance sheet will be enhanced by the AS$175m in cash compensation. As of 3Q09, Noble was ungeared (adjusted for working capital) post the injection of US$646m in fresh capital from CIC (~11% of its enlarged share base) or ~50% based on nominal gearing.
Action and recommendation
Assuming this proposal succeeds, Noble will be on its way to extracting greater value from its portfolio of assets. MRE has an Outperform rating on Noble Group and a 12-month target price of $3.30.
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Mike's Take:
Noble has once again demonstrate its strong deal making and execution capability. Having to just acquire Gloucester at A$7.00 just about 6 months ago, the company is now sitting on a nice A$1 profit for the sales to Macarthur. What is more impressive is the structure of the deal as in that noble opt for a part cash part share structure, which 1) will give it a share in Macarthur hence consolidating all its coal asset into 1 single listed vehicle, and 2) A$175m of war chest for it to play the game going forward.
Price wise the share was pushed to a high of S$3.17 versus its last closing of S$3.01. It reach its peak of $3.26 on 9th Dec, which should pose some resistance as it approach this region. However, the chances of it testing this peak and establish new peak is very high.
There will be some pullback after the euphoria, but these should be good time for some accumulation. If you believe that the commodity cycle will remain bullish in 2010, Noble is definitely a good counter to consider.
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