Chinese-controlled Yancoal Australia has approached Gloucester Coal to merge their neighbouring coal assets in a deal worth A$2 billion. This represents a hefty 42% premium of its current market capitalisation and will transform them into an A$8 billion coal giant. Both Yancoal and Gloucester have mines and projects in New South Wales and Queensland and we view the merger positively for them to create the scale of economies and synergy.
This is a shrewd move by Yancoal. Besides tapping into the strong demand in Asia, Yancoal is looking to take over Gloucester and use it as a backdoor route for listing in Australia. In this way, they save lot of time and resources and without having to bear the risk of issuing an IPO in this shaky environment.
Gloucester is 64 percent owned by Hong Kong-based Noble Group, which has a track record of buying junior miners, helping to fund projects, and then selling them out. We expect Noble Group, which already attempted to sell its stake in Gloucester to Macarthur Coal last year, to maximise the opportunity this time. Gloucester's shares have tumbled 42 percent this year to the current cap of A$1.4 billion, putting it in the 30 worst performing stocks among Australia's 200 biggest companies.
We believe Noble group can use the cash to acquire other undervalued miners, especially in this bearish environment where opportunities abound. Its Singapore-listed shares jumped 7 percent to S$1.195 on the prospects it would be able to sell its Gloucester stake for a profit before halted for trading. It is set to resume trading tomorrow.
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