Bryan Frith
WHETHER the market is correct in continuing to punt on a higher bid for Riversdale Mining despite the target board’s unanimous recommendation of Rio Tinto’s $3.9 billion cash offer of $16 a share remains to be seen, but if there are any parties considering a rival offer they have more time in which to make a decision than is usually the case.
That’s because of the terms of pre-bid agreements entered into between Rio and several Riversdale shareholders, including the hedge fund Passport Capital and three directors — the executive chairman Michael O’Keefe, the managing director Steve Mallyon and the chief financial offer Niall Lenahan.
Those shareholders have granted call options over a strategic 14.9 per cent of Riversdale, exercisable at the bid price of $16 a share “or any higher price notified by Rio in its absolute discretion”. That’s no doubt to cover the possibility of a rival offer forcing Rio to lift its offer price.
Rio and Riversdale have entered into a bid implementation agreement which, among other things, requires Riversdale to notify Rio if it enters into talks with a potential rival bidder and, subject to consent, provide the identity of that party. If Riversdale provides any confidential information to a potential rival bidder it must also provide it to Rio, if it has not already done so.
Moreover, if a rival bid is made, Rio has the right to match or top it.
Rio despatched is offer documents on January 13 and the offer is open for five weeks, unless extended.
Under the pre-bid agreements, the call options are exercisable on the latter of the 28th day of the offer period or the day on which the offer is declared unconditional.
In practice, that means that Rio cannot declare the offer unconditional until the offer has been open for four weeks; that is, before February 8.
Normally, Rio would be free to declare the offer unconditional at any time. It’s thought that the minimum four-week requirement was insisted upon by the parties to the pre-bid agreements in order to maximise the chance of a rival offer by giving any interested third parties sufficient time to consider their position.
It’s now almost two months since Riversdale confirmed that it was in takeover discussions with Rio (at a mooted bid price of $15 a share) and almost one month since Rio announced a recommended offer of $16 a share, and while there has been plenty of speculation of a rival offer none has as yet surfaced.
Among those mentioned in early speculation were Anglo American, Brazil’s Vale and India’s Tata Steel, which is Riversdale’s major shareholder with 24.34 per cent of the capital and owns 35 per cent of a joint venture to develop the Benga mine, one of Riversdale’s tier-1 coking coal projects in Mozambique’s Moatize Basin, which is shaping up to become the world’s second-largest coal province — after Queensland’s Bowen Basin but ahead of the central Rockies in Canada.
Riversdale concedes in its target’s statement, which was released yesterday, that it’s possible a more attractive offer could materialise but points out that since Rio’s offer was unveiled last month, and before entering into the implementation agreement, Riversdale allowed a number of parties who were considered to be potentially interested in acquiring the company to conduct due diligence but, as yet, Rio is the only party that has been prepared to make an offer.
The main speculation of a rival offer now centres on International Coal Ventures (ICVL), a consortium of state-owned Indian companies, comprising Coal India, Steel Authority of India, iron ore miner NMDC, power company NTPC and steel company RINL.
ICVL is reported to have received a report from its adviser Citigroup and will meet later this week to decide whether to make a bid.
Riversdale says that it has not received any superior proposal and is not aware of any party having an intention to make such a proposal, which suggests that ICVL has not been in contact with Riversdale or its advisers, not even to ask to be allowed to conduct due diligence. If that is so, the consortium appears to be following an unusual strategy of attempting to negotiate through the media.
Riversdale’s share price has been above Rio’s offer price since the bid was announced and, after yesterday’s release of the target’s statement, added a further 19c to $16.50, after sales up to $16.61, despite the target board’s cautionary remarks on the possibility of a higher offer.
That indicates that investors are still punting on a higher offer although perhaps with less confidence than earlier when they pushed the share price above $17.
The Riversdale board has unanimously recommended the Rio offer, in the absence of a superior proposal. The board includes Narenda Misra, who is the vice-president and group head of mergers and acquisitions at Tata Steel.
However, the target’s statement makes it clear his recommendation is given in his capacity as a Riversdale director and does not reflect Tata’s position, which has reserved all of its rights in relation to its shareholding and any response to the offer. However, Tata’s balance sheet is capital-constrained and it is not considered likely to be a counterbidder, although it may wish to retain an equity position.
Riversdale’s three major shareholders own 52.5 per cent of the capital — Tata 24.34 per cent, Companhia Siderurgica Nacional (CSN), Brazil’s second-largest steelmaker, 15.56 per cent and Passport 12.98 per cent.
Mindful of that, Rio has structured its bid to include a minimum acceptance condition of only 50.1 per cent.
Passport has given Rio call options over 7.8 per cent of Riversdale but logic suggests that if a superior proposal doesn’t emerge it will also tip in its remaining 5 per cent. Retail holders can be expected to largely follow the board recommendation.
But Rio still may need acceptance of at least some of the holding of Tata and CSN if it is to achieve 50 per cent-plus majority ownership and control. That’s Rio’s immediate aim and consideration of a mop-up bid to secure full ownership may come at a later stage.
If the Rio bid was to fail, Riversdale’s share price would be likely to fall sharply, perhaps to as low as the $10 at which the shares were selling before Rio came on the scene.
Riversdale, and no doubt Tata and CSN, would be conscious of the recent fate of Macarthur Coal which sought to play off two bidders Noble Group and Peabody — and ended up without any offer.
Pitching the minimum acceptance condition at 50.1 per cent is no doubt designed to put pressure on Tata and CSN to ensure that acceptances are at least sufficient to ensure that Rio satisfies the condition.
While Riversdale is sitting on huge deposits of high-quality coking coal, development of its coal projects would also require significant capital expenditure which carries significant risks for shareholders and if it could be funded would require significant dilution through the sale of equity in the projects.
Last June, Riversdale announced a non-binding MOU with China’s Wuhan Iron & Steel Corp (WISCO) to acquire 40 per cent of Riversdale’s Zambeze coal project. Discussions with WISCO are now in limbo and Rio’s bid is effectively conditional on the proposal not being reactivated.
Rio’s offer price represents a premium of almost 60 per cent to Riversdale’s three-month VWAP which the target board considers compensates shareholders for the upside potential they will forgo if they accept the offer.
The target’s statement estimates Riversdale’s share of the capital cost of stage 2 and 3 of the Benga project at $400 million, while Zambeze would require at least $US2.9 billion.
Riversdale has a third potential tier-1 development at its nearby east Tete project, for which it has been seeking potential joint venture partners, and which could require further capital in the order of $US3bn.
Adding in the $3.9bn market capitalisation of Riversdale means that any acquirer would require in the order of $10bn to realise the value in Riversdale ($5bn for a 50 per cent stake). Rio is one of very the few companies with pockets deep enough to fund such a requirement.
Source: www.theaustralian.com.au
