Political Risks To Yanzhou Offer For Felix Weigh On Shares

Concerns that a A$3.54 billion takeover offer by China's Yanzhou Coal Mining Co. Ltd. (1171.HK) for Felix Resources Ltd. (FLX.AU) could stumble upon political and regulatory hurdles contained investors' enthusiasm for the deal Friday.

Felix shares Friday traded below Yanzhou's offer price while Yanzhou shares narrowed early gains as investors weighed the chances of Australian government approval of the deal.

If successful, the transaction would be the biggest Chinese takeover of an Australian company to date, but the deal, announced Thursday, must first win approval from Australia's Foreign Investment Review Board, or FIRB, at a time Chinese investment in Australia has become a politically charged issue.

Shareholder approval is unlikely to be a stumbling block with directors who control 49% of the stock backing the deal, subject to a higher offer emerging. Chances of a rival bid also appear low although several potential counter-bidders were being canvassed by the market Friday.

Felix resumed trade Friday and closed up 4.1% at A$17.60 a share, below the A$18 Yanzhou is offering, in a broader Australian market that climbed 0.6%.

Analysts said this partly reflected the fact that A$1 of the offer will be delayed as a special dividend to be paid in October, but was still largely due to the political risks surrounding the deal.

ABN Amro analyst Tom Sartor said the offer was at a significant premium to his valuation of the stock at A$12 a share and that shareholder approval looked guaranteed.

Sartor said he could not see any strategic or national interest issues that would give the Australian Government reason to scuttle the deal, but that recent developments in relations between the two countries were creating market uncertainty.

"We believe the deal warrants FIRB approval, however market perception of this being a potential stumbling block in relation to strained Australia-China iron ore trade relations and foreign investment decisions may see nervous investors selling under the implied terms," he said.

Relations between Australia and China have been strained by the arrest of four Rio Tinto Ltd. (RP) employees as well as Rio's decision to abandon a US$19.5 billion deal with Aluminum Corp. of China and this year's heated round of annual iron ore price talks.

Australian Resources and Energy Minister Martin Ferguson said he could not comment on individual cases, but that Australia remains open to Chinese investment.

"Australia has a long history of welcoming foreign investment and it is encouraging to see continued interest in Australian resource development by companies from China and elsewhere around the world," he said.

A spokesman for Australian Treasurer Wayne Swan declined to comment on the Yanzhou bid.

A Felix spokesman declined to comment on the prospects of the deal winning regulatory approval.

 
   Acquisition Looks "Expensive" For Yanzhou 
 

"It's hard to say whether the deal will succeed" given the regulatory hurdles, said Shanghai-based Citic Securities analyst Wang Ye.

Yanzhou ended up 2.3% at HK$12.40 in Hong Kong, retreating from a high of HK$13.00 early in the session. The stock ended up 3.7% in Shanghai at CNY20.72, also narrowing from an earlier 10% jump.

Credit Suisse said in a note Friday that the Felix acquisition "looks expensive on all fronts," with Yanzhou paying a price that equates to 22 times forecast 2010 earnings, which is a 15% premium over what other global coal producers are currently trading.

However, the investment bank said the acquisition will help boost Yanzhou's future earnings growth, and expects the deal to boost the company's net profit by 14% in 2010 and by 37% in 2011. Analysts said they see limited further upside for Yanzhou in the near term, even as the latest acquisition, if successful, will significantly boost Yanzhou's coal output, with some forecasting a 40% rise in its output by 2012.

Investors' views on the Yanzhou price effectively boil down to whether or not they believe Felix's Moolarben thermal coal development in New South Wales state can deliver all of the upside the company has promised.

UBS analysts said their valuation of the stock was A$15 a share, based on a more conservative ramp up of Moolarben than Felix has flagged.

They said that applying Felix's promised ramp up of the mine would boost that valuation to A$21.61 a share.

Yanzhou spokeswoman Tina Law declined to comment on the value of the offer and the approval processes.

 
   Rival Bidders Canvassed By Market 
 

Speculation has already begun about potential rival bidders for Felix, although with the coal miner having been in play for a year, some argue the chances of a rival bid now are low, and this view appears to be reflected in the share price reaction.

Felix first revealed that it had received takeover approaches in July last year and has been in halting talks with a number of parties since.

Xstrata PLC (XTA.LN) is being tipped by some as a possible counter bidder, as it has the Ulan mine adjacent to Felix's Moolarben project and has been in and out of court with Felix on issues relating to the mine for years.

Credit Suisse said Xstrata could extract synergies of around US$25 million a year from Felix and would also benefit from access to Felix's stake in the Newcastle Coal Infrastructure Group port development.

Xstrata wasn't immediately available for comment.

Other companies being canvassed as possible counter-bidders are Noble Group Ltd. (N21.SG), Vale (RIO) and Peabody Energy Corp. (BTU). A Peabody spokeswoman in Australia wasn't immediately available for comment. Noble declined to comment and Vale couldn't be reached for comment.

Merrill Lynch said the Yanzhou offer represented fair value but that a superior offer could not be ruled out.

However, one person familiar with the situation said most of the players being talked about have been through Felix's data room over the past year and have not tabled bids.

-By Alex Wilson, Dow Jones Newswires; 61-3-9292-2094; [e-mail]

(Rachel Pannett in Canberra and Elisabeth Behrmann in Sydney contributed to this story)