Centennial and Austral to merge

THERE was no surprises on market this morning when Centennial Coal formalised a $300 million scrip bid for Austral Coal, increasing Centennial’s exposure to the lucrative coking coal export market.
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Centennial Coal chairman Bob Cameron

Staff Reporter

The two listed New South Wales companies addressed a meeting of shareholders and analysts this morning to outline the deal that is expected to lift Centennial into the elite Top 100 Australian Stock Exchange ranks.

Austral shareholders will be offered 10 Centennial shares for every 37 Austral shares, equating to an offer of $1.10 per Austral share.

Austral managing director Ugo Cario said the deal was an 8% premium on Austral’s share price, and after examining a range of options for the one-mine, debt-laden company, the offer was deemed fair and reasonable.

Benefits to Austral shareholders included substantially less exposure to risk given Centennial’s size and greater resources.

Austral was solely a coking coal producer with production exclusively from the Tahmoor longwall mine, but the deal meant thermal coal had now entered the equation, Cario said.

Centennial’s long-term power station contracts for thermal coal provided the security of being counter-cyclical. In addition, the company had a resource base of 3 billion tonnes and a good pipeline of new projects.

“From Centennial’s perspective, we’ve been looking at this mine for some time. It represents an obvious fit,” Centennial chairman Bob Cameron said.

The deal offered enhanced product and market diversification and in particular gives Centennial hard coking coal exposure. A significant earnings per share accretion can be expected by shareholders, Cameron said.

Strong expected cash generation from Tahmoor meant Centennial will not have to approach the market for equity for its Anvil Hill development project in the Hunter Valley.

The new entity, prior to ASX re-rating, will be capitalised at $1.5 billion and is expected to be higher thereafter.

The Austral deal lifts Centennial from its current 127 ranking to 112, but Cameron hopes the company’s re-rating will lift it into the Top 100 on the ASX. In addition, gearing drops from 50% to 40% and drops even more dramatically looking ahead.

The deal also shifts Centennial’s exposure to its customers and export markets. In the 2005 financial year Centennial sold 76% domestic thermal coal, 5% semi soft coking coal and 19% export thermal coal. With Austral’s contribution domestic thermal drops to 67%, coking increases to 17% and export thermal drops to 16%.

Centennial’s sales revenues shifts from being 63% domestic to 45% and from 37% export to 55%.

Cameron is buoyant about the coking coal market and expected prices to be strong for some time. “It’s nice to be into a large but niche market,” he said.

Managed production for Centennial increases to over 20 million tonnes and is expected to reach 30Mt by 2010 as the company takes on its fifth longwall mine.

The deal also offers inherent synergies (rationalising administrative and corporate functions), expected to save the company $6 million pre-tax. Group purchasing power improves in key items such as electricity and roof supports Cameron said.

The company also expects to reap benefits from coal blending opportunities that become possible with Austral’s Tahmoor mine situated on the rail link between Centennial’s western mines and Port Kembla.

The timing of the deal is unclear but bidders’ and target statements would be dispatched jointly to Austral shareholders, probably within two weeks, with the first possible closing date set one month from date of dispatch.

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