Chinese state-owned Yanzhou Coal Mining's proposal to acquire the 22% of shares it does not own in Australian coal producer Yancoal Australia for A$905 million ($822 million) might violate strict foreign investment conditions set by the Australian government three years ago, analysts said Tuesday.
Yancoal Australia said in a filing to the Australian Securities Exchange Tuesday that it had received an offer from its 78% shareholder Yanzhou Coal to take full control of the company by swapping Australian-listed Yancoal shares for Yanzhou depositary interests listed in Hong Kong.
"This proposed transaction moves Yancoal ownership in the opposite direction to that required under the Foreign Investment Review Board conditions at the time of the Gloucester merger," said analysts Chris Drew and Ken Tham in a Royal Bank of Canada Capital Markets report.
"Rather than have Yanzhou selling down its interest, Yanzhou is intending to take Yancoal private," the analysts said. "With two rulings (one at the time of the Felix acquisition, and reinforced upon the merger with Gloucester) requiring Yanzhou to reduce its interest in Yancoal, it appears far from certain that FIRB would allow this transaction to take place."
The Sydney-based RBCCM analysts added that Yanzhou's share offer was priced at a discount to the current Yancoal share price, which was trading at A$0.75/share Tuesday.
Yanzhou agreed to a number of strict conditions proposed by the Australian government in 2009 regarding Yancoal Australia, its acquisition vehicle for the A$3.5 billion ($3.25 million) takeover of Australian coal company Felix Resources. The conditions were reiterated when Yancoal acquired another Australian coal miner, Gloucester Coal, for A$1.6 billion in 2012.
YANZHOU AGREED TO KEEP LISTING, HEADQUARTERS IN AUSTRALIA
The guarantees Yanzhou gave the Australian government included keeping Yancoal's headquarters in Australia and its share-listing on the Australian Securities Exchange. Yanzhou agreed to reduce its ownership in Yancoal to 70% by the end of 2013 and ensure that Yancoal's CEO and chief financial officer reside in Australia, according to an October 2009 statement by the treasury ministry.
"With these undertakings provided by Yanzhou, I consider that this acquisition is consistent with Australia's national interest," the assistant treasurer said at the time.
The treasury department declined to comment Tuesday about the case or whether it would allow Yanzhou Coal to proceed with the takeover
Yancoal Australia spokeswoman Sue Cato also declined to comment.
The company said in the ASX filing that it intends to apply for a "foreign exempt listing" of its depositary interests and to delist Yancoal from the exchange.
Yancoal said in its statement that the company's independent non-executive directors were considering the acquisition proposal from Yanzhou, and they intended to start due-diligence investigations. The company noted that regulators must approve the deal.
Yanzhou Coal subsidiary Yancoal International last month provided Yancoal Australia with a three-year $250 million loan on an unsecured basis with no covenants to be used for working capital and capital expenditure, Yancoal said June 27.
