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Yanzho:r (Ohina) Bids for Felix Hesource$ (Australia)1 On 13 August 2009, the Felix Board announced it had entered into a Scheme Implementation...

Which of the various valuation techniques do you find the most and least useful? Please reference attached document, thank you
Yanzho:.r (Ohina) Bids for Felix Hesource$ (Australia)1 On 13 August 2009, the Felix Board announced it had entered into a Scheme Implementation Agreement for an all cash offer by Yanzhou Coal (through its Wholly Owned Subsidiary Austar) to acquire all the issued shares of Felix (the Transaction) to be implemented by way of a scheme of arrangement (the Scheme). Felix Resources, Scheme Booklet, 30 September 2009,p.6. While we continue to believe the emergence of a counter-bidder is likely, the short list has diminished thw reducing the probability of such an outcome. That said, we would not recommend shareholders accept the $18ps offer for now. - "Felix Resources: A New Year, A New Mine," Macquarie Equities, 1 September 2009, p. 1. Tb the CEO, Mr Brian Flannery. Dear Brian.The consen- sus is that the right value is about AUD24 per share. A dis- crepancy of 33% seems beyond the purported claim of "Fair," As soon as the offer was announced, Yanzhou's share price went up considerably whilst Felix's went down. -Blog note by Felix shareholder, August 2009. It was late October 2009, and Quillan and his fellow investors were debating on what to do about their shares in Felix Resources (FLXAU), anAustralian coal mining com- pany. Yanzhou Coal Company of China had been courting Felix for nearly a year, and had made a formal offer on August 13 worth AUD18 per share-the Scheme, which Felix's Board and management team had endorsed.2 But many stockholders were not sure the offer was a good one. When Yanzhou had first approached Felix in December 2008, the offer had been AUD20 per share. But a lot had changed since then, inctuding the price of coal, the value of the Australian dollar, and concerns over Chinese acquisi- tions of Australian mineral producers. Shareholders were now being pressured to accept the Scheme. China, Coal, and Yanzhou Coal Company The Chinese economy consumed massive quantities of coal. The rapid economic growth of China drove the demand for both thermal or steam coal (for electrical power production) and coking coal (for steel production) ever skyward. Coal-fired electric power provided roughly 80% of China's electricity, and was expected to stay at that level for a number of years. In 2008 alone, China, accounted for 43o/o of global coal consumption. Chinese Coal. China was rich in coal itself, with reserves of its own estimated at l4o/o of global reserves. Although a global commodity, most of the world's countries consume coal in the country where it is produced, with one large exception-Australia. Australia exports 75o/o of its production, mostly to Japan, South Korea, and China. But the Chinese coal market had grown increasingly complex.The Chinese government had imposed a freeze on all new coal exports in February 2008 and increased its export tax to t3o/" on existing export commitments. At the same time, China had ordered more than 15,000 small coal mines closed in recent years, primarily a result of unsafe working conditions and continued mine accidents. With much of China's coal reserves in the far north and west of the country far from the coastal markets and not readily accessible, China has been looking more and more to for- eign markets to fulfill its growtng coal demands. Thus, Chinese coal companies have been looking to pur- chase more coal from outside China. Because of its proxim- ity, high level of development and abundant natural resources, Australia had been the target of a number of these Chinese acquisition efforts. One such purchase attempt had generated negative press and strained relation- ships between the two governments. In June 2009, Australian-based Rio Tinto rejected China's Chinalco's bid to purchase its major mining assets and partnered with rival BHP Billiton in a shocking last-minute effort. Despite the tensions, Chinese companies continued to buy overseas assets. Coal Prices. As illustrated in Exhibit 1, Australian thermal coal prices had long been relatively flat-at least until 2008. Strong demand from countries such as Japan, South Korea, and China, and limited supply due to inclement weather and under-sized ports in Australia, had induced a price run-up in mid-2008.3 But just as quickly as they had gone up, coal prices col- lapsed.The global recession caused coal demand and prices to fall in late 2008. But they did not stay down for long, as the Chinese and Indian economies recovered relatively lCopyright @ 2011 Thunderbird School of Global Management. All rights reserved. This case was prepared by Natsuki Baba, Katerina Dankova, and Jeanine Divis under the direction of Professor Michael H. Moffett for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. 2The Australian dollar, depending on the source cited, may be shown as AUD,A$, or $. 3Note that Australian coal prices are quoted in U.S. dollars.This is in-line with global practice of pricing coal in U.S. dollars, similar in industry practice to that of oil or other major global commodities'
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@AustralianThermalCoalPrice(January2001-october2009) USD/metric tonne 200 180 160 140 120 100 80 20 0 *"\"*tu\.1""1"d*.t*"1.f*.\,*'1"."\,. Sourcer lnternational Monetary Fund. 12,000 BTU/pound, less than 1% sulfur, 14% ash. FOB Newcastle/Port Kembla. i - s b :l a F -.1 ,I = E R x ,{ iE E t 60 40 C: 5 - quickly, once again stoking the demand for coal. Yanzhou, as part of its valuation of Felix, believes that coal prices are likely to stay between USD88 and USD104 per tonne for several years. Yanzhou Coal Company. With expected 2009 revenues and after-tax profits of HKD19 billion and HKD6.1 billion, respectively, Yanzhou Coal Company was China's fourth largest coal producer. The company was also representative of much of China's new industry, as it was both government-controlled but publicly traded. Yanzhou was listed on the Hong Kong Stock Exchange, the New York Stock Exchange, and the Shanghai Stock Exchange. Its total market capitalization was RMB70.1 billion (USD10.3 billion) on September 30,2009. Yanzhou had begun its investment in Australian coal in 2004 when it acquired the Austar coal mine. But since that time,Yanzhou had failed to increase production from Austar significantly, the company falling behind its strategic plan. Additionally, because of stricter safety requiremenE production had fallen at six of its mines in Shandong Province, China. Therefore, without the purchase of Felir Yanzhou's production would plateau and it risked falling behind its competitors. Felix Resources Limited (Australia). Felix Resources Limited of Australia (FLX.AU) was Australia's 12rh largest coal mining firm. Felix was expected to close 2001) with more than AUD260 million in profits on more than AUD680 million in sales. The company owned four underground and open cut mines in New SouthWales and Queensland, and was expanding its mining operations ar Moolarben in New South Wales. Felix sold the majority of its production to the export market-to South Korea- Japan, and now China. Felix also owned 15% interest in the Newcasfle Coal Infrastructure Group port under construction, and Ultra Clean Coal (UCC), a technology for producing a cleaner Fi F -LE F E,
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