Hogsback explores the Whitehaven value gap

LOST: $1.3 billion. If found, please return to Nathan Tinkler, care of Whitehaven Coal, 259 George Street, Sydney, or drop it off to Hogsback, care of International Longwall News.

Staff Reporter

The missing money, which is unlikely to be found in a suitcase or under a mattress, is the difference between what Tinkler is offering to pay for Whitehaven and the value the stock market has placed on the company.

Why there is such a massive difference between a proposed takeover bid and the market value for the target company is one of the investment world’s more interesting questions.

It would be less interesting if the market was valuing Whitehaven at $3.9 billion before Tinkler announced his plan to pay $5.25 billion to privatise the coal miner.

But, because the $1.3 billion value gap exists after the $5.20 a share bid was revealed there are reasons to ask whether investors believe the takeover will proceed.

One of the more obvious questions relating to the gap is whether it represents the world’s easiest way to make a fortune, which is surely what must happen if an investor loads up with Whitehaven shares at $3.85 and sells them to Tinkler for his promised $5.20.

Never before on the Australian stock market has a profit of 35% looked so easy. If The Hog could rustle up $10,000 he could trouser a cool $3500 profit when the paperwork arrives to complete the $5.20 takeover.

That, of course, is the real issue. When will Tinkler complete his paperwork, and when will the promised $5.20 become a confirmed $5.20.

Tinkler, and his cheer squad, say the deal will be complete at the price proposed. However, to slightly twist a famous comment from Mandy Rice Davies about an affair with Lord Astor some decades ago: “they would say that, wouldn’t they”

The problem for Tinkler and friends is the market is voting with its collective wallet and saying through the $3.85 share price of Whitehaven that it does not believe the $5.20 will arrive and, if it does, it will be a long time coming.

Top of the market’s worry list is finance and the need for the Tinkler group to secure debt finance for the deal. Despite having 48.3% of Whitehaven’s issued capital in the bag through an agreement to “roll into” the deal, and another 16.7% said to be on the edge of signing up, that still leaves a large financing hole to fill.

Banks that have done well out of Tinkler’s earlier deals will be keen to return for another feed. However, in this difficult market and with coal prices falling, there will be tough conditions on any debt package.

That raises another interesting way of looking at the Whitehaven situation – the difference between how one group of investors with deep coal roots see the outlook for coal and how the wider market sees the outlook.

Obviously Tinkler and friends are optimists or they would not be orchestrating a $5.25 billion privatisation deal. Equally obviously, the market is being led by pessimists who do not see such a rosy future.

Both sides cannot be right. If coal prices do recover, the Tinkler group will have pulled off the deal of a lifetime. If coal prices do not rise they will be left holding a pile of debt and a struggling business.

Some seasoned observers, such as the analysts at Deutsche Bank, believe Whitehaven is a stock to buy despite uncertainties about debt financing and the coal price. Deutsche this week told clients to continue buying Whitehaven because it valued the stock at $4.90 – about $1 more than the ruling market, but an interesting 30c less than the proposed Tinkler bid.

Japan’s Nomura Securities, which should have a good handle on Asian coal demand, disagrees. It told clients that the difficult outlook for coal means Whitehaven shares could dive below $3 if the proposed Tinkler bid is not converted into a formal offer.

The Hog reckons Nomura might be onto something with its thoughts on what might happen should the bid not proceed. That is the major reason why Whitehaven is trading so far below the proposed $5.20.

Whatever the outcome the next few weeks will ensure that Whitehaven is the most closely watch coal stock, not just in Australia, but across the mining world.

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