Yanzhou-Gloucester merger

Yanzhou Coal Mining Company Ltd has announced a A$8 billion (US$8.1 billion) merger with Gloucester Coal Ltd which will see the Chinese company acquire 77% of Australia’s largest independent coal mining company. The deal values Gloucester at A$2.1 billion.

Under the agreement, Yanzhou is offering A$3.20 in cash and the option to receive either shares in the merged company or a combination of shares and contingent value rights (CVR) through a scheme of arrangement.

The merged companies would have a combined coal production of 15Mt/y in the Hunter Valley of New South Wales.

Yanzhou chairman Li Weimin said the merger "reflects the company’s strategy to grow our Australia business and to become a global leader in the coal mining sector".

Yanzhou's coal assets are held through Yancoal, whose assets include a 100% interest in the Austar and Yarrabee coal mines, a 90% interest in the Ashton Coal joint venture, an 80% interest in the Moolarben JV, a 15.4% interest in the Newcastle Coal Infrastructure Group and a 5.6% interest in the Wiggins Island coal export terminal.

Gloucester issued a statement saying that its directors "believe that a combination of Gloucester and the Yancoal assets has the potential to create a world class coal production and export operation".

The merger is conditional on the new entity obtaining a listing on the Australian Securities Exchange and remains subject to shareholder approval, with 75% approval required from Gloucester shareholders.

The Gloucester directors have not yet recommended accepting the proposal but Noble Group, Gloucester’s largest shareholder with 64.5%, has indicated it would vote in favour of the merger.

The merger would also provide Yancoal with a backdoor listing on the ASX. Yanzhou is already under instruction to float off 30% of Yancoal. This was one of the conditions imposed by the Foreign Investment Review Board when it bought Felix Resources for A$3.2 billion two years ago.

The A$3.20/share cash payment to Gloucester investors will comprise a special dividend of approximately A$0.564/share (payable after court approval of the merger but prior to the effective date of the merger) and a capital return of around A$2.644/share.

The merged company would pay the former Gloucester shareholders who participate in the merger (and who elect to receive CVR shares as a component of their consideration) a settlement that seeks to guarantee Gloucester shareholders a minimum price.