Acquisition in the mining sector of Austrailia - Essay Example

?ACQUISITION IN THE MINING SECTOR OF AUSTRAILIA EXECUTIVE SUMMARY This reports aims to view and analyze growing mergers and acquisition deals from world. In the year 2011, the mining and metal sectors have successfully emerged as strong sector with growth trend after riding the high global economic uncertainty. To strengthen their financial position dominant players of this industry across world, and especially in Australia turned to mergers and acquisitions. Year 2011 witnessed global mergers and acquisition of $.162, 439 million with 43percent higher than previous year in terms of value (e Ernst & Young, 2012). In Australia alone, total value of M&A deals in mining and metal sectors in year 2011 was $.38, 594 million as compared to $.23, 469 million in the year 2010. Mergers and acquisitions in mining and metal sectors of Australia also witnessed large inbound and outbound deals. This report sheds lights on the aim and objective of these deals based on two case studies from Australian mining sector. Case studies used for the purpose are: Atlas Iron acquiring Giralia resources ($.805 million) and BHP Billiton acquiring HWE mining ($.732 million). Both deals been successfully completed in year 2011with both parties of two deals belonging to same continent. The two case studies witnessed overall aim of acquisitions by two firms to enhance their resource base, increased synergy in their operations and undertake low risk transactions. The capital agenda guiding these transactions was to preserve, optimize, raise and invest capital (e Ernst & Young, 2012). Atlas Iron acquiring Giralia resources was mainly driven by motif to increase it resource base. BHP Billiton acquiring HWE mining was aimed to improve synergy and efficiency in operation with undertaking contractor firm within BHP Billiton’s umbrella. Successful completion of deals benefitted both parties as well as their shareholders. In the end with reference to the academic literature both deals are discussed to extract level of alignment and support from literature. Table of Contents EXECUTIVE SUMMARY 1 ACQUISITION IN THE MINING SECTOR OF AUSTRAILIA 4 ATLAS IRON ACQUIRING GIRALIA RESOURCES 8 DEAL DETAILS 9 BHP BILLITON ACQUIRING HWE MINING 12 DEAL DETAILS 12 SUPPORT FROM LITERATURE 13 TRANSACTION ALLIGNMENT WITH LITERATURE 15 CONCLUSION 16 REFERENCES 17 INTRODUCTION Australia stands on the leading position on mega acquisitions table with Australian BHP Billiton acquiring Petrohawk Energy of US (Oil & gas sector) with $.11, 776 million in cross border acquisition (e Ernst & Young, 2012). Mining sector of Australia also remained active to enhance its capacity, strengthen operations and portfolio. With considerable activity of Australian companies in acquisitions in the year 2011, this report will explore various areas of these acquisitions. Two inbound acquisitions deals in Australia with Atlas Iron acquiring Giralia resources ($.805 million) and BHP Billiton acquiring HWE mining ($.732 million) in focus, following areas are explored and discussed in this report: Were both deals able to achieve success completion within defined time? Details of both details. Type and level of discrepancy arisen, if any. For instance resistance from management or shareholders etc. Overall aim of the acquisition Benefits to the acquirer and Benefits to the target firm (acquired firm). Level of support these deals can leverage from the academic literature. ACQUISITION IN THE MINING SECTOR OF AUSTRAILIA In the year 2011, the mining and metal sectors have successfully emerged as strong sector with growth trend after riding the high global economic uncertainty. Among other options to raise capital, mining sector provided an ideal environment for mergers and acquisitions specifically; however, while total deal value was up 43% on the prior year to $162.4bn, volumes were down 10% to 1,008 deals, highlighting the difficulty in evaluating, financing and executing deals (e Ernst & Young, 2012). (e Ernst & Young, 2012) (e Ernst & Young, 2012) Dominance of mergers and acquisitions specially characterized in domestic market offered following benefits: To drive operational cost downward with growth simultaneously. Low risk transaction Domestic consolidations offered synergies and work conducted in familiar environment. Low risk growth with leveraging existing knowledge to the market (e Ernst & Young, 2012). Similar trend characterized the mining sector in Australia and mergers and acquisitions remained dominant playing tools along with other capital raising and growth strategies. (e Ernst & Young, 2012) Investment in mining sector of Australia also requires investment in infra-structure; quoted by Indian giant GVK Power and Infrastructure from India (e Ernst & Young, 2012). Among commodities, coal was the most sought after commodity in Australia in 2011, and investment from domestic and international players flew in Australian coal with Peabody Energy Corp’s $4.9bn acquisition of Macarthur Coal on the top of list (e Ernst & Young, 2012) while iron ore leading on the third rank on value based Australian deals as given figure below . (e Ernst & Young, 2012) Mining companies sought to consolidate (by acquiring or being acquired) in order to strengthen balance sheets, develop assets, resources or to become an attractive acquisition target. Top ten deals on the basis of value of deal in the year 2011 in Australia are given below: (e Ernst & Young, 2012) Among many acquisitions, this report is aimed to study two acquisition stories from same industry which is mining in this case with both target and the acquirer from Australia. Two deals selected from the above table for the purpose are: 1- Atlas Iron acquiring Giralia resources 2- BHP Billiton acquiring HWE mining. This report will conduct in-depth study of two acquisitions, will find the alignment with academic literature and would try to conclude if the deals shall be considered successful or otherwise. ATLAS IRON ACQUIRING GIRALIA RESOURCES Atlas Iron’s acquired 100 percent stake of Giralia Resources with the deal valued at U.S $805 million and it ranks as top seventh deal on top-ten chart. Perth-based, Atlas Iron Ltd. on Dec. 21, 2010 agreed to buy iron-ore explorer Giralia Resources NL in a deal with target valued at A.$828 million (Whitley, 2010). Atlas Iron is an independent Australian iron ore company, mining and exporting Direct Shipping Ore (DSO) from its operations in the Northern Pilbara region of Western Australia. Since listing on the ASX in late 2004, Atlas has grown rapidly and is now a member of the ASX100 index (Atlas, 2012). Giralia Resources Pty Ltd, formerly Giralia Resources NL, is an Australia-based company engaged in exploration activity on mining tenements predominantly situated in Australia and Indonesia (Google Finance). Its resources included several advanced 100% owned iron-ore prospects, which were the company’s major exploration and development focus (Swanepoel, 2011). It was acquired by Atlas Iron in 2011 and delisted from Australian Stock Exchange on 07/04/2011 (Giralia Resources). Given Below is the five year trend to March 8, 2011 when its trading was suspended following necessary acquisition: (Google Finance) DEAL DETAILS Atlas Iron to expand its resources in iron ore eyed Giralia Resources NL. In December 2010 Atlas Iron announced that it has valued Garalia approximately AU $ 828 mn (US $ 826 Mn) off market takeover bid for 100 percent stake (Atlas Iron). The offer began on January 11, 2011 for a month and acceptance offer of 90 percents. Offer was based on the closing price of Giralia on the day prior to the announcement (which was $2.99), the offer represented an implied value of $4.57 per Giralia share, a significant premium of 53 percent to the price traded price of $2.99 (Behrmann, 2010). For acceptance, shareholders were given two options: Re-consideration’ which will provide shareholder with 1.5 Atlas Shares for every Giralia share, or The “Share/Cash Consideration of 1.33 Atlas Shares AND fifty (50) cents cash. With the rise in the Atlas share price, as of Friday 11 February 2011, both consideration alternatives then represent an implied value of at least $5.64 per Giralia share. STOCK DASHBOARD: March 01, 2011 Atlas Iron Giralia Resources Closing Price (February 28, 2011) $3.85 $5.77 Price change from previous trading day: -1.3% -1.4% Relative Strength (6 months percentile rank): 79.5 90.1 Market capitalization: $3 billion $1.1 billion Turnover volume: 3,411,153.0 24,420.0 Volume Index (1 is average) 0.7 0.04 Turnover value: $13.4 million $143,680 Turnover period: 8 months 1 year 55 days Value of $1,000 invested 1 year ago: $1,906 $3,518 Source: (Business Spectator) Experts valued Giralia shares to be priced in range of $2.68 to $3.34 per Giralia Share, with a preferred value of $2.99 per Giralia Share. Hence, offered prices were said to fair and reasonable. Atlas Iron has strategic rationale for this acquisition bid with its core intention to expand its resources. David Falanagan, Managing director of Atlas, stated that Atlas was expected to increase its measured, indicated and preferred resources to 602.3 million mt from 204.7 million mt before acquisition i.e. in year 2010. Atlas further stated that both companies have either joint or very close resources at Mt Webber, McPhee Creek, Beebyn Range and Western Creek. This acquisition would benefit Atlas with growing production, reduced operating cost, maximize cash flows and would add significant value to shareholders (Steel Orbis, 2010). MD David Flanagan further quoted this acquisition to be milestone and transforming moment for company for its future targets of production rate of 22mtpa by 2015 (Business Spectator). Atlas paid 8.9 times the total assets of Giralia Resources compared with the median multiple of 2.5 times for 10 industry deals since 2003 (Behrmann, 2010).  Peter Arden, senior mining analyst at Ord Minnett Ltd. Quoted this deal beneficial for Atlas. On the other part, the offer from Atlas was also appreciated by Giralia Resources and management suggested its shareholders to accept the offer in the larger and beneficial interest of company as it would provide shareholders to be part of larger and more liquid company. Port capacity and mining capability of Atlas would maximize the value of asset of Galaria Resources and infrastructure would benefit Galaria Resources an access to market. This offer acceptance was also supposed to benefit shareholders with capital gains tax rollover relief (4). Together, both companies considered it beneficial for the interest of shareholders and the deal was declared “free from conditions’ (Swanepoel, 2011). Hence, it was smooth transaction that resulted after surge in takeovers; particularly in Iron ore with $8.8 billion in the sector till December for year 2010 as compared with $1.8 billion in 2009 (Behrmann, 2010). There was no resistance from management as well as shareholders side in both companies. BHP BILLITON ACQUIRING HWE MINING BHP Billiton’s acquisition of HWE Mining was the 8th biggest deal of the sector with value of U.S. $732 million. BHP Billiton is an Anglo-Australian multinational mining, oil and gas company headquartered in Melbourne, Australia and its major management office is in London, United Kingdom. BHP Billiton are the world’s largest producers of major commodities, including aluminum, copper, energy coal, iron ore, manganese, metallurgical coal, nickel, silver and titanium minerals, and uranium along with substantial interests in oil and gas. It is the world's largest mining company measured by 2011 revenues and as of February 2011 it is the world's third-largest company measured by market capitalization. BHP Billiton has a history of acquisitions for expansion and diversification of its portfolio. HWE Mining was a subsidiary of Leighton Holdings. HWE Mining, Leighton’s contractor of mining division that provided services to Western Australia Iron Ore operations of Billiton. DEAL DETAILS BHP Billiton signed Heads of Agreement with Leighton Holdings to acquire the HWE Mining subsidiaries that provide contract mining services to its Western Australia Iron Ore operations. The Heads of Agreement relates to the mining equipment, people and related assets that service the Area C, Yandi and Orebody 23/25 operations. These operations collectively account for almost 70 per cent of Western Australia Iron Ore’s total material movement. The purchase price is US$735 million (A$705 million), subject to working capital adjustments (BHB Billion, 2011). This acquisition involved about $400 million of mining equipment and related assets in the mentioned area with transfer of approximately 2600 people to BHP Billiton Iron Ore (Duffy, 2011) BHP Billiton had this acquisition in line with its stated intention to get Western Australia Iron Ore operations from contractor services to owner operation mining and the highly skilled work force that has been successfully conduction operations for BHP Billiton under their umbrella efficiently and safely (Bulk Materials International, 2011; Swanepoel, 2011). The deal was completed in fourth quarter of 2011.This acquisition by BHP Billiton was also in-line with the growth in mineral exports and mining in Australia which are advanced stage of development with projects worth record A$174 billion ($177 billion) accounting mineral and energy projects according to government forecasts in June 2011. It was also beneficial for the acquirer to counter the rising impact of inflation that has detrimental impact from wages, raw material and energy cost (Behrmann, 2011). Hence, the move also had all characteristics that constituted the acquisition move especially in resources and mining sector. This deal was also smoothly transacted as though being large amount and details involved it had little impact on operations as they were originally conducted by same group and employee transfer from Leighton Holdings to BHP Billiton reduced any chances of resistance from the employees. This mutually agreed upon deal was signed on 9th August 2011. SUPPORT FROM LITERATURE Acquisition of firms has been an old phenomenon and there is diverse opinion on the matter of acquisition based on the variable emphasized. For instance, for lay man or being particular for an employee of the firm; acquisition is beneficial if it’s not at the cost of his/ her job, the culture of the acquiring firm is adoptable, acquiring firm has knowledge of business domain of target firm etc. It has different value for shareholder whose main interest lies in shareholders’ value and expectation are always on positive side of getting premium. Among large number of factors and perspectives; some have been cited below: Moeller, Schlingemann, and Stulz, (2003) studies that acquisition announcements are associated with decrease in aggregate shareholders wealth. It also refers that most important factor that determines shareholder wealth is size of firm; large firms make large losses and small firms’ acquisition gives shareholders aggregate benefit. Moreover, only acquisition of subsidiaries has aggregate positive gains. Bryant stated that there are large number of factors such as expectation of realization of synergies, achieving growth and diversification benefits, buying undervalued assets and attempting strategic realignment etc. The primary motivation for most mergers is to increase the value of the combined enterprise (Bryant). And referred that shareholders are sensible investor and keep an eye on the fund performance, in case they found it declining there is significant outflow from acquired mutual fund (Bryant). Otchere, and Ip, in a study highlighted the wave of cross border mergers and acquisitions in Australia where Australian firms have mainly been acquisition targets. It concluded that target firm’s rival realized significantly positive abnormal returns following both the acquisition proposal and termination announcements. The avenue of value creation for both target and bidder and pointed that cumulative abnormal returns are the expected value that can result from synergies around the announcement. It also referred to the difference in share price of both target and bidder that arise in response to mode of payment but could not mention it to be statistically significant. Develops from support of neo-classical theory of synergies in operational, financial and economic perspective and states that even in presence of financial synergies that reduces the optimal point of cost of capital, it is operational and economic synergy that dominates value-maximization motive of firms engaged in mergers and acquisitions. It further explores that behavioral theory with agency motives and hubris motives affecting the bidder with abnormal returns in negative way and positive for target firms. TRANSACTION ALLIGNMENT WITH LITERATURE There has been immense study on mergers and acquisitions and its impact in short term, long term, at proposal and termination time; to bidder and target firms each referring to different perspective from cross border to domestic transactions. Selected transactions have been in line with synergy theory of the given literature. Atlas Iron as mentioned paid 8.9 times the total assets of Giralia Resources compared with the median multiple of 2.5 times for 10 industry deals since 2003 (Behrmann, 2010), it also mentioned in its report that assets acquired from Giralia Resources do not fall in the business definition and aim of group was to get the expanded resource base therefore, the synergies in term of financial and operational are taken up to benefit in the long-run. This is also in line with analyst comments Ord Minnett Ltd. Quoted this deal beneficial for Atlas in following words. “It sort of prolongs Atlas’ life in the long-term rather than adds to it in the short- term.” For BHP Billiton these synergies are of main concern. It has expanded its resource base mainly in knowledge and skilled worker in safe and efficient manner with reducing cost of contractor layer in its model. The acquisitions are also expected to be in line with shareholders wealth evident from the initial stage to completion there has been no conspiracy or conflict that that two transactions. This acceptance from analyst, shareholders as well as management of all four firms (two targets and two bidders) is reflective of the fact of them being acceptable. CONCLUSION Despite great uncertainty that has characterized world financial and economic sector, mining sector has been strongly focusing on growth plan and year 2012 is also predicted to follow the same pace of growth with companies pursuing agenda to preserve, optimize, raise and invest capital (e Ernst & Young, 2012). To strengthen the balance sheet and resource base, mergers and acquisitions has been among dominant moves and Australia- the centre of mining has been among active players. Among large number of mergers and acquisition deals in Australia, two has been Atlas Iron acquiring Giralia resources and BHP Billiton acquiring HWE mining. In deals, the target and the bidder has been benefitted with no discrepancy. In former, bidder successfully expanded its resource base for long term and target firm’s shareholders were benefitted with opportunity to be part of firm with more liquidity and with higher capacity to benefit from resources. In the latter case study, big firm has acquired a contractor that assured addition of skilled human resource under its broad umbrella and reduced cost of contractor and the target firm also became part of strengthened balance sheet. Both case studies didn’t evidence any conflict and mutually agreed upon smooth deals; hence, successful acquisitions driving benefit of synergy. REFERENCES Atlas Iron. http://www.atlasiron.com.au/IRM/Company/ShowPage.aspx?CPID=2714&EID=35124479 Atlas. (2012). Introduction, Available at http://www.atlasiron.com.au/IRM/content/company_intro.html [Accessed 17th September 2012] Behrmann, E. (2010). ‘Atlas Iron Agrees to Buy Giralia for $825 Million to Expand Pilbara Mining’, Bloomberg. Available at http://www.bloomberg.com/news/2010-12-21/atlas-iron-agrees-to-buy-australia-s-giralia-resources-for-822-million.html [Accessed 18th September 2012] Behrmann, E. (2011). BHP Billiton Agrees to Buy Leighton Iron Ore Unit in W.A. for $735 Million, Bloomberg. 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Available at http://www.miningweekly.com/article/atlas-iron-declares-giralia-offer-unconditional-2011-02-14 [Accessed 17th September 2012] Swanepoel, E. (2011). ‘BHP completes acquisition of HWE Mining’, Mining Weekly. Available at http://www.miningweekly.com/article/bhp-completes-acquisition-of-hwe-mining-2011-10-03[Accessed 17th September 2012] Whitley, A. (2010). ‘Australia Has Record Quarter for Takeovers, Reviving 2011 Deal Forecasts’, Bloomberg. Available at http://www.bloomberg.com/news/2010-12-22/australia-has-record-m-a-quarter-reviving-2011-deal-forecasts.html [Accessed 20th September 2012] Read More