Premiums paid in hunt for bargains


With many good companies trading at low prices due to global forces, it isn't only retail investors who are scouring the market looking for bargains.

These times usually lead to increased merger and acquisition activity where cashed up consortiums look to buy companies that they believe are undervalued - and at times are willing to pay a premium for what they believe will add growth in the future.

An example this week of such activity is Whitehaven Coal (WHC), the second-largest Australian independent coal miner.

On Monday, a group led by coal magnate Nathan Tinkler made a conditional bid for the company at $5.20 cash a share.

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The company stock price was $3.45 at close of trading the previous session, meaning the bid was a 51 per cent premium.

As is often the case in these deals, it is conditional on the satisfactory completion of a four-week exclusive due diligence giving the Tinkler-led group time to structure and complete the financing requirements.

WHC managing director Tony Haggart said the offer was "reasonable given the circumstances".

Those circumstances may be the fact that the stock has fallen from $6.13 in mid April, including 20 per cent this month, and that the coal market has experienced a slump in both prices and demand.

It is interesting that Tinkler already holds about 21 per cent of the company and was part of the 48 per cent of shareholders who supported the bid. Before his initial move the market was actually expecting him to reduce his holding of WHC.

This offer values the company at $5.3 billion and joins a number of deals in the Australian coal sector, which has seen companies such as Peabody and Yanzhou Coal buy up smaller independent miners.

At first glance this seems to be structured well enough to develop into a firm deal.

However, after the collapse of the Flinders Mines and Magnitogorsk Iron takeover last week and the stock price of Sundance Resources (31c and the bid is 57c) nothing is certain until the deal is signed, sealed and delivered.


To subscribe to Adam Farrall's weekly market update, contact him at Sentinel Stockbroking on 9225 0020 or email afarrall@sentinelgroup.com.au

Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time.

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