Peabody Energy Takes a Shot at Australian Mining Giant Macarthur Coal

In the global coal industry, Australia is a gateway to the high-growth markets of Asia, especially China. As should be no surprise, the deal-making there has been intense, as seen in such deals as Yanzhou Coal Mining's $3.2 billion purchase of Felix Resources.

Now Peabody Energy (BTU), the largest U.S. coal producer, is jumping into the fray. The company has made a $3 billion unsolicited bid for Australia's Macarthur Coal, which is actually in the process of striking its own deal for Gloucester Coal. However, Macarthur (MACDF) has already rejected the bid as inadequate in light of the growth prospects of the industry.

The Australian Coal Rush

Macarthur is the world's largest producer of low-volatile pulverized coal injection coal, which is used in the creation of steel. To mine the coal, Macarthur has forged strong relationships with strategic partners like CITIC Resources, JFE Shoji Trade Corporation, and NS Trading.

As steel production has grown, PCI coal prices have surged, and Macarthur has been a big beneficiary. In fact, the company has recently begun selling to mills in China.

Peabody already has a strong presence in Australia, where it operates eight plants, but why not have more? After all, Peabody is likely to see tepid growth in its U.S. operations. In its latest quarterly report, the company announced that it wants to double its exports of Australian metallurgical and thermal coal over the next five years. A deal for Macarthur would definitely help it meet that ambitious goal.

Getting the Deal Done

Pulling off the acquisition of Macarthur will be tricky. First, Peabody hopes to derail the proposed merger of Macarthur and Gloucester, which goes to a vote in less than two weeks. This means that Peabody will need to convince the company's top three shareholders, which include Citic Australia Coal Ltd., ArcelorMittal (MT) and Posco (PKX), that its deal is the smarter one.

To do that, Peabody will likely need boost the bid, which is now at A$13 per share. While that's 18.4% higher than Macarthur's three-month average, following public news of the offer, shares of Macarthur jumped, and were trading Wednesday morning at A$14.05.

The valuation for Macarthur is far from cheap, coming to roughly 17 times earnings before interest and taxes. This is twice as much as the Yanzhou-Felix Resources transaction. Yet if Peabody wants to achieve its production goals in Asia, the company will definitely need to pay a premium price.