No worries about the ‘dangers’ from a ‘slowing’ Chinese economy yesterday in one high profile deal yesterday involving a major Chinese investment in Australia: the Gloucester Coal merger with China’s state-owned Yancoal Australia.
The wider market may have tanked more than 1% in a 57 point lurch downwards as investors here and offshore worried that the cut in China’s 2012 growth target to 7.5% from 8%, was somehow bad news.
The fall here yesterday and in Europe and the US on Monday night is symptomatic of the ill-informed understanding of China and the rest of Asia in the US, Europe and even Australian investment communities.
That weakness continued overnight Tuesday with big falls on Wall Street.
China’s economy grew 9.2% (target 8%) in 2011. This year growth is forecast around 8.2% to 8.7% (target 7.5%).
But if you follow the money, then China is confident that it remains on target to continue growing.
So Yancoal Australia’s Chinese parent has no qualms about doing the deal with Gloucester Coal and its Asian-based shareholder, Noble Group.
The two companies entered a merger agreement in December which, if concluded successfully, will create the largest sole coal producer in Australia.
And the deal would also be the biggest investment by a Chinese state-owned company in Australia’s coal sector.
So there’s a lot of prestige in China riding on the deal.
Due diligence since the December announcement of the deal had resulted in some changes to the original proposal, according to a much forecast statement from Gloucester Coal yesterday.
As a result, Gloucester shareholders will receive a smaller cash payment, Gloucester’s ownership of the new entity will be lower, and the merged entity will have $300 million less debt.
Gloucester shareholders originally were to receive a cash payment of $3.20 per share under the deal, but that has been cut marginally to $3.15 due to cancellation of some Gloucester options, Gloucester said in yesterday’s statement.
The ownership ratios of the new entity have been adjusted by one percentage point, with Yancoal now to control 78% of the new ASX-listed entity and Gloucester the remaining 22%.
The special dividend and capital return of $3.15 will now consist of around 44c of fully franked special dividend and approximately $2.71 of capital return.
The Gloucester Board has unanimously recommend the revised merger proposal, in the absence of a superior proposal and subject to the Independent Expert concluding the merger proposal is in the best interests of shareholders
Yancoal also has advised that it expects to contribute approximately $300 million less debt to the merged group, due to currency exchange movements and the Chinese company’s recent cash flow.
It originally had expected to contribute about $2.7 billion in debt to the new group.
‘‘The Gloucester board unanimously believes shareholders should support the proposal as it provides an opportunity to participate in the benefits of creating a world-class coal producer,’’ Gloucester chairman James MacKenzie said in a statement yesterday.
Gloucester’s largest shareholder, Noble Group, has indicated it will vote in favour of the deal.
The proposal remains subject to approval from the Foreign Investment Review Board and other Australian and Chinese regulators.
Documentation will be sent to Gloucester shareholders in April, and an approved merger may be completed in mid-June.
Gloucester Coal shares fell 3.3% or 28c to $8.18.
