Last week, coal producer Yancoal (ASX:YAL) outlined plans to raise $2.5 billion to pay for Rio Tinto’s (ASX:RIO,NYSE:RIO,LSE:RIO) coal mines in Australia. Hedge fund Senrigan Capital Management is now challenging the equity raising saying it is unfair to minority shareholders.
Yancoal announced the entitlement offer to acquire Rio’s coal business last Wednesday (August 2), with support from mining giant Glencore (LSE:GLEN) and China’s Yanzhou Coal Mining (HKEX:1171). The business includes the Hunter Valley and Mount Thorley Warkworth operations, and if approved will allow Yancoal to become Australia’s largest pure-play coal producer.
Yanzhou, which owns 78 percent of Yancoal, agreed to subscribe for $1 billion of the offer, while Glencore committed for $300 million. A further $1 billion will be coming from two Chinese groups: China Cinda Asset Management (HKEX:1359) and Shandong Lucion Investment Holdings.
The funding plans, which will involve issuing 23.6 new shares for every one currently held, is “unnecessarily highly dilutive and ‘value shifting,’” Senrigan told the Takeovers Panel, adding that it does not allow existing minority shareholders a reasonable and equal opportunity to participate.
The Hong Kong-based hedge fund has also argued that the other Chinese investors are associates of Yanzhou, which could raise its voting power from 78 percent to 89.15 percent as a result.
Other minority shareholders have also voiced concerns over Yancoal’s plans. Noble Group (SGX:CGP), which holds 13.2 percent of Yancoal, said last week it might also file an objection with the Takeovers Panel. The regulatory body has not yet decided whether to investigate the matter.
Still, the move by Senrigan has the potential to delay or even derail the deal, according to David Lennox, an analyst at Fat Prophets in Sydney. “It brings a level of uncertainty to the table, which I’m sure Rio would rather not have to deal with,” he said.
Last month, Yancoal beat Glencore in a three-week bidding war to acquire Rio’s coal assets. After a fierce battle, Rio backed Yancoal’s deal as it had fewer regulatory issues, though financing was less clear. The Swiss commodities giant eventually struck a deal with Yancoal to buy a stake in the coal operations once the deal with Rio is completed.
“Glencore will be sitting back and watching this closely. They might be getting their pencil out and doing the numbers just in case this Yancoal financing falls over. They could come back and even strike a different deal,” Lennox added.
Yancoal’s share price is down 71.43 percent year-to-date, but on Wednesday (August 9) it gained 7.69 percent, closing at AU$0.14.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.