HONG KONG (Reuters Breakingviews) - The commodity business is often about blending different grades of coal, iron ore or crude oil. Yancoal Australia’s $2.5 billion share sale is a more exotic alloy, mixing Australian public company procedure and Chinese state capitalism.
The Sydney-listed group is buying Rio Tinto’s Coal & Allied unit for $2.7 billion. It saw off a counterbid from Switzerland's Glencore, then struck a truce that lets the trading giant into the deal. Now Yancoal - ultimately controlled by officials in the rustbelt province of Shandong - needs to find the money.
The solution, a $2.35 billion rights issue and $150 million placement, is unorthodox. The deal will massively dilute existing shares in the sub-$200 million small-cap; investors can buy nearly 24 shares for every existing security they own, at a near-68 percent discount to Monday’s closing price.
But the slim 4.6 percent discount to the “theoretical ex-rights price” gives investors little incentive to do so. It might not matter much. Yancoal has few institutional supporters, and is 78 percent owned by Yanzhou Coal Mining, the Chinese-listed arm of a state-owned enterprise. Another 13 percent belongs to Noble Group. The embattled commodity trader reportedly opposes this deal.
So Yanzhou, which is sticking in $1 billion, found some unusual underwriters: state-owned bad-debt manager Cinda, Glencore, and Lucion, a Yanzhou associate. Using this trio rather than banks, who hate keeping big stakes, suggests Yanzhou expects limited take-up. That recalls SOE flotations in Hong Kong, where state backing makes up for a lack of genuine institutional demand.
Yancoal was the first Chinese SOE to list in Sydney, a “national interest” hoop Australia’s treasurer made it jump through to get a 2009 takeover approved. That requirement has been of questionable value, given a small free float and low liquidity.
The enlarged group will be a bigger player in coal, with a larger dollar value of tradeable stock, and a healthier balance sheet. Yet this looks like another victory of form over substance. A free float of somewhere between 2 and 22 percent, depending on investor appetite, will still be too small for index inclusion. This is a state-driven Chinese deal to which the veneer of a public company rights issue has been applied. Think of it as Shandong blended with Sydney.
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