Energy & Resources

Bidding war

Chinese bid for Australian coal asset challenged by rival Glencore offer


An M&A battle over Aussie coal

The commodities giant Glencore has been described in many ways in its time, not least as clandestine, controversial and filthy rich. But one identifier that Glencore’s boss Ivan Glasenberg won’t have heard before is a comparison to a sixth century Chinese general.

For that is how the Chinese press is referring to Glencore’s behaviour, following its last-minute attempt to scupper Yanzhou Coal’s $2.45 billion bid for Rio Tinto’s Australian coal assets.

The exact phrase in Chinese – ban lu sha chu ge Cheng Yao Jin – is an old saying which translates as ‘plans get disrupted when Cheng Yaojin unexpectedly turns up’ and it references the Tang Dynasty general’s habit of ambushing his enemies.

However, says that in many ways Glencore is the more appropriate acquirer for Rio Tinto’s Coal & Allied assets as it already owns coalfields right next door in the Hunter Valley.

The website even borrowed another Chinese phrase to identify Yanzhou Coal as the unwanted party, suggesting that it is “snatching food from the jaws of a tiger”. It also said Yanzhou Coal should have completed the deal more quickly, given that it first agreed a price with Rio Tinto more than a year ago. Since then coal prices have improved and Glencore has all but finished an asset disposal plan, moving back into growth mode.

Glencore now has the financial means to beat the price that Yanzhou was proposing: $1.95 billion in up-front cash, followed by five annual $100 million instalments ($2.45 billion in total). It struck on June 9 – just weeks before the deal was set to close – putting in an unsolicited bid for $2.05 billion in up-front cash plus five $100 million instalments ($2.55 billion in total).

That forced Yanzhou Coal to sweeten its offer. Its latest proposal dispenses with the deferred payments and Rio Tinto’s board has advised shareholders to accept, even though the offer price is lower.

Glencore has a longstanding desire to acquire the assets and it might put in another bid. Indeed, The Australian newspaper reports that Glencore thought it had first right of refusal on the deal and that it was “infuriated” when Yanzhou Coal’s offer was announced.

But analysts say that Rio Tinto favours Yanzhou Coal’s bid because there is less regulatory risk. Glencore would have to get all the government clearances first, meaning that it could take longer to complete the takeover. As we wrote in WiC364, Yanzhou Coal has already secured approvals from Australia’s Foreign Investment Review Board (FIRB), a fairly significant achievement given the growing tendency for Chinese bids to be blocked on national interest grounds.

Domestic commentators believe that, for once, the politics of the situation have been playing in China’s favour. There are suggestions Beijing could have dragged out its own approval of a rival bid from Glencore, claiming antitrust concerns. Hardly any of Coal & Allied’s output is currently sold to China, but the Ministry of Commerce could have made things difficult. Another consideration is that Rio wouldn’t have wanted to annoy its Chinese customers. Chinese aluminium giant Chinalco also owns 10% of Rio too – as Investec’s Hunter Hillcoat told Bloomberg, “Rio is very close to the Chinese and probably doesn’t want to risk that relationship.”

From China’s perspective, the deal comes at a time when it wants more say in the quarterly negotiations to set benchmark prices for coking coal. These discussions are currently a two-way conversation between Australian exporters (led by Rio, Glencore and Peabody) and the Japanese steel importers. China is unhappy about being excluded, especially now that it is the major importer. However, says the Japanese are also pressing for changes to the system and want to follow the iron ore industry where contracts have been based on monthly spot prices since 2010.

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