Australian Takover Panel clears way for Yancoal capital raising

The Australian Takeover Panel on August 15 declined to conduct proceedings to block a US$2.5 billion entitlement offer by ASX-listed Yancoal Australia after minority shareholders submitted an application to the panel last week.

The minority shareholders contended that the offer was unnecessarily dilutive and would transfer power to Yancoal’s majority shareholder, Yanzhou Coal Mining, in a way that is unlawful. The panel disagreed, citing a lack of material evidence to support the shareholders’ claims.

This isn’t the first time Chinese companies have come under scrutiny amid their aggressive outbound M&A activities as part of the Belt Road initiative and 'go global' strategy. ChemChina’s US$43 billion acquisition of Syngenta was delayed for over a year awaiting anti-trust approval by European authorities. Attempts from Li Ka Shing's Cheung Kong Infrastructure Holdings and China's State Grid to acquire stakes in Australian state-owned power company Ausgrid were blocked last year by Australian authorities, who said it would go against the national interest.

In January, Yancoal entered into an agreement to acquire 100% of the shares in Coal & Allied Industries Limited from Rio Tinto Limited for US$2.7 billion. This deal was eventually accepted at a slightly higher level after Glencore attempted to derail the agreement with a rival offer. Yancoal now plan to operate the Hunter Valley Operations, which is part of the acquired assets, under a joint venture with Glencore.

On August 1, Yancoal announced an entitlement offer to raise around US$2.35 billion, and released an offer document for the entitlement offer in conjunction with a placement to strategic investors at the same price to raise an additional US$150 million.

The offer price is at a 67.9% discount to the closing price of Yancoal shares on July 31 2017. Eligible shareholders are invited to subscribe for additional shares with a minimum guaranteed allocation, and any rights not taken up or sold by shareholders will be offered for sale under a bookbuild. The proceeds raised under the entitlement offer and placement will be used to provide funding for Yancoal's acquisition of Coal & Allied.

Yancoal's majority shareholder, Yanzhou Coal Mining Co, has a relevant interest of approximately 78% in Yancoal and also holds subordinated capital notes (SCNs) convertible into Yancoal shares. Yanzhou has committed to take up US$1 billion of its entitlement in the offer and to convert as many SCNs as it is able to. Yanzhou is itself majority owned by Chinese state-owned coal mining enterprise, Yankuang Group.

In an August 10 statement, the Takeovers Panel said that it has received an application from Mt Vincent Holdings Pty Ltd and Osendo Pty Ltd in relation to the affairs of Yancoal Australia Limited. The applicants were indirect wholly-owned subsidiaries of Noble Group Limited, which has a relevant interest in 13.16% of Yancoal ordinary shares.

The minority shareholders contended, among others, that the entitlement offer was priced and structured in manner that was unnecessarily dilutive, disproportionally affected existing minority shareholders, was highly unattractive to new investors, and that the dispersion strategies put in place were of no practical value to existing shareholders.

They also claimed that the entitlement offer had the effect of transferring value and control to Yancoal's majority shareholder, Yanzhou Coal Mining Company Limited, in a way that is inconsistent with the Corporations Act and deliberately circumvents the previous ruling in Yancoal Australia Limited [2014].

The entitlement offer is underwritten by International High Grade Fund B (Cinda) for up to US$750 million, Glencore Coal Pty Ltd for up to US$350 million, and Shandong Lucion Investment holdings Group Co., Ltd. (Lucion) for up to US$250 million. The minority shareholders said that Cinda and Lucion are associates of Yanzhou, therefore the voting power of Yanzhou and its associates could grow from 78% to 89.15% as a result of the entitlement offer.

On August 15, the Australia Takeover Panel said it was unlikely to find that the entitlement offer would give rise to unacceptable circumstances as the dispersion strategies provided shareholders with a guaranteed opportunity to maintain their existing percentage interest in Yancoal and the possibility to obtain additional shares.

The panel found a lack of material evidence to suggest the entitlement offer would lead to a change in control in Yancoal or increase Yanzhou’s voting power. The panel also found a lack of material evidence to suggest association between Yancoal, Yanzhou, the underwriters, or the placement investors.

The panel concluded that “there was no reasonable prospect that it would make a declaration of unacceptable circumstances” and therefore declined to conduct proceedings.



16 Aug 2017

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