It is slightly amusing that Julia Gillard has seized on the proposed $4.7 billion joint bid by Peabody Energy and ArcellorMittal for Macarthur Coal as a validation of her carbon pricing package.

Whatever the eventual impact of carbon pricing on Macarthur it would, of course, be factored into the price that the prospective bidders will ultimately be prepared to pay. Indeed, the timing of the approach, a day after the carbon pricing scheme was unveiled, was probably designed to exploit the confusions and negative sentiment for coal that the package would be expected to generate.

There was never any expectation that a carbon price would somehow savage the value of export coal producers, particularly coking coal producers. The coal industry lobby, in fact, has been careful to argue that the package will have an adverse impact on growth relative to what it might otherwise have been and on where the marginal dollar of investment is made, not that the sector won’t continue to grow strongly.

Macarthur is also, as previous unsuccessful attempts by Peabody and others have demonstrated, unusually strategic. It is one of the largest independent coking coal producers and, in particular, has more than a third of the global market for low-volatile pulverised coal injection material, which can be injected directly into blast furnaces.

Those previous attempts to acquire the group foundered because of the unusually cluttered structure of Macarthur’s register. ArcellorMittal has 16% of the group but China’s Citic Group owns about 24% and South Korea’s Posco 7% and all three of those shareholders are on the register for strategic reasons.

Peabody appears to have learnt from its previous unsuccessful attempts to crack that register with approaches that ranged from $13 a share to $16 a share. Those approaches were based on schemes of arrangement that would have delivered Peabody 100% of Macarthur if the strategic shareholders sold. It also had a lot of discussions with those shareholders to see whether it was possible for it to gain control but for them to remain as shareholders.

This time it has teamed with ArcellorMittal in a 60:40 joint venture (Peabody would have 60%) and has outlined plans for a conventional off-market bid with a 50.1% minimum acceptance condition.

That lowers the threshold for success — it only needs another 34% of Macarthur to win control — and means it could gain control without the support of Citic and Posco.

It also offers Citic and Posco the options of selling into the offer or retaining their interests in what could, if all other Macarthur shareholders accepted the offer, become a joint venture in which Peabody had a stake of about 41%, ArcellorMittal about 28%, Citic about 24% and Posco about 7%.

What Peabody has also done, however, is to create a blueprint that others could emulate.

In the past — apart from Peabody — Xstrata, Vale and New Hope have all kicked Macarthur’s tyres and, in New Hope’s case, made an offer. Xstrata’s newly listed ally Glencore might also be interested, as might Rio Tinto, which has made no secret of its interest in mid-sized coking coal miners and has demonstrated its ability to execute an offer in far more complex circumstances, with the success of its bid for Riversdale Mining. The Noble Group-controlled Gloucester Coal might also have ambitions to participate in any auction, although it would need a cashed-up partner.

Any prospective bidder that was able to tie up the Citic stake, or convince Citic to play the ArcellorMittal role in a joint bid, would gain a very significant advantage over Peabody and its partner.

Given that the bidders are foreshadowing a formal offer rather than a scheme (at this point the approach is indicative, conditional and non-binding) Macarthur doesn’t have the same veto on the outcome that it did when Peabody was proposing a scheme that required the target board’s support. Macarthur itself is therefore likely to be even more proactive in trying to help encourage and facilitate an auction.

The process is likely to be protracted and, given Macarthur’s strategic value, contested, with the proposed carbon pricing regime only a very minor factor in assessment of its value.

*This first appeared on Business Spectator.

Peter Fray

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