Australia | Dec 14 2011
– Whitehaven and Aston announce merger or equals
– Stockbrokers generally see the deal as reasonable
– Potential for proposal to induce other bidders for Aston
By Chris Shaw
Consolidation has been a dominant theme in the Australian coal sector for some time and this trend appears set to continue with Whitehaven Coal ((WHC)) and Aston Resources ((AZT)) announcing a merger agreement.
The deal will see Aston shareholders receive 1.89 Whitehaven shares for every Aston share held. Given Whitehaven closed last week at $5.82 per share, less a 50c special dividend, the price implies a value for Aston shareholders of $10.05 per share.
A merger of the two would create a group with total JORC resources of 2,003 million tonnes and marketable JORC reserves of 672 million tonnes, with a diverse range of assets in the Gunnedah Basin. Macquarie suggests there is potential for annual production to top 20 million tonnes from 2015/16.
The deal will also see Whitehaven acquire Boardwalk Resources, an unlisted play, that would deliver additional assets in the Bowen Basin and Hunter Valley. Boardwalk also has a 19.9% stake in Coalworks.
For Macquarie, the reasoning behind the merger proposal is a diversification in the asset base of the combined entity. For Aston the benefit would be moving away from a single production source, while the upside for Whitehaven is access to the long life and low cost Maules Creek project.
The merger would also offer the potential for what UBS suggests could be significant synergies, potentially in excess of several hundred millions of dollars. UBS notes these synergies would come from blending, lower operating and capital costs and some tax benefits.
Macquarie is comfortable with the merger terms, suggesting the numbers appear fair to both sets of shareholders. UBS is not as convinced, noting while Whitehaven shareholders would get 51.1% of the merged entity, on a value weighted average price basis over the past year implies a ratio that would give Whitehaven shareholders around 60% of the new entity's register.
JP Morgan is more on the Macquarie side, seeing the proposal as indicative of no significant dilution for either party. Rather, JP Morgan expects the value being ascribed to the early stage assets within Boardwalk Resources will be the focus of further scrutiny as it is difficult to see how these assets contribute much value in the medium-term.
The other point made by JP Morgan is there appears to be significant value in the Maules Creek project, so the merger proposal may act as a catalyst for interest from a third party. Given this, the broker retains an Overweight rating on Aston.
Credit Suisse raised a similar point, suggesting the proposal may be enough to spark some interest from other potential buyers of Aston before the merger scheme is approved in March of next year. The complication is a option agreement with Tinkler Group for 19.99% of Aston, something expected to act as a deterrent for any possible rival bidders.
The merger proposal has seen some brokers become restricted on the two stocks, but overall sentiment remains positive. As evidence, the FNArena database shows five-for-five Buy ratings for Whitehaven, while Aston scores two Buy recommendations and two Holds.
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