Nathan Tinkler’s $900 million question

Nathan Tinkler is no stranger to audacious moves, but despite his largely successful record, the Whitehaven Coal share price suggests few analysts and investors have faith in his $5.25 billion, $5.20-per-share bid for the miner.

On Monday, as Whitehaven’s shares came out of a trading halt, the stock soared 17.97%, peaking at $4.18. But the bump was soft, and yesterday the miner’s shares fell 3% lower to $3.94, leading The Australian Financial Review to report investors were betting against the deal.

Unless Tinkler changes this sentiment, the cost of the deal will go up dramatically, as he has an unusual offer for shareholders that he is using to keep the cost of the deal down. If it fails, that could force him to raise a further $900 million in financing – a feat many believe he will struggle to pull off.

Perhaps the deal’s very complexity is what is failing to inspire confidence in the market (Whitehaven is still trading at a significant discount to the bid price). For those watching the day-by-day play, it’s easy to become lost in the strange configuration of the proposal.

But should Tinkler succeed in his creative approach, it could open up a new avenue for corporate takeovers.

The proposal was made public on last Friday evening, six weeks after the coal entrepreneur sold his coal assets to Whitehaven in return for a 21.4% stake in the company. The offer was pitched at a 51% premium to the share price on the Friday close. Whitehaven agreed to allow Tinkler to conduct four weeks’ exclusive due diligence on the company’s books.

Tinkler’s proposal for the miner is complex. His task is to convince shareholders to exchange their shares in Whitehaven for a stake in the private holding company he will form that will in turn own the miner. He says 48.3% of the register has already agreed to move over (that includes his 21.4% stake).

Essentially, Tinkler is asking Whitehaven’s shareholders to remain (indirectly) Whitehaven shareholders, foregoing the cash payout if they believe the company’s fundamentals will result in more than $5.20 a share in the long run. This saves Tinkler money, as he doesn’t have to buy out the shareholders. His aim is to convince another 16.7% to join them, otherwise, he’ll have to pay the remaining 51.7% of the register $5.20 a share.

This would require him to raise up to an extra $877 million from investors, on top of the $2.25 billion he has already secured from the banks.

The market seems to think Tinkler won’t secure the funding for the takeover. The shares closed down 3% yesterday at $3.94 – if investors were confident of a deal, they would be buying into the company for a chance to cash out at $5.20.

Part of the concern is linked to how long the proposal has dragged on. Rumours about the takeover first surfaced some weeks ago, but it took until the end of last week for Tinker to show his hand. He took weeks to secure the financing he does have, and who knows how long it’ll take him to secure more.

However, there are other factors in his favour. For one, JPMorgan, Barclays Capital and UBS have provided provisional letters of support equalling at least $2.25 billion, subject to due diligence.

He also has the support of Whitehaven’s management, with managing director Tony Haggarty describing the deal as “reasonable given the circumstances.” Haggarty, however, has indicated he is unlikely to stay with the miner should the deal go ahead.

And most analysts seem to think shareholders would be happy to sell at anything above $5 a share, though this eagerness to sell might make them more likely to take the cash rather than wait in Tinkler’s private vehicle to see if the company improves.

The present and future of Whitehaven’s coal business

Whitehaven shares rose from $1 in 2009 to more than $6 a share in 2012. They’ve since dipped sharply, especially after the miner bought Tinkler’s companies, Aston Resources and Boardwalk Resources, in May. Regardless, many analysts believe the underlying fundamentals of the stock are sound.

The coal industry globally has been difficult in recent months. Most (80%) of Whitehaven’s earnings come from thermal coal, with the remainder being low-grade coking coal. Thermal coal prices have deteriorated, a factor cited by analysts at Citi when they downgraded the target price for Whitehaven stock from $7 to $5.50. A tonne of thermal coal is currently going for US$87.75, and has been falling since January this year. Nomura forecasts the average production cost of a tonne of thermal coal at US$75 including royalties, giving miners like Whitehaven a slim margin on which to make a profit – especially if the price falls further.

Nonetheless, Whitehaven remains an analyst favourite, with most maintaining their ‘buy’ rating. “While coal markets are challenging at present, and we expect some difficulties in ramping up production … we see enough long-term value in Whitehaven to maintain our buy,” Citi analyst Craig Sainsbury told The Australian recently.

Australia is the world’s leading coal exporter. The black rock is our main fuel in electricity production, and is an important export to India and China.