Noble Group

[greengiraffe]

Yancoal debt deal with Yanzhou in doubt after Takeovers Panel ruling
THE AUSTRALIAN DECEMBER 15, 2014 5:04PM

Sarah-Jane Tasker

Reporter
Sydney
Murray Bailey, chief executive officer of Yancoal Australia Ltd., a unit of Yanzhou Coal Mining Co., stands for a photograph...
Murray Bailey, chief executive of Yancoal Australia. Picture: Brendon Thorne/Bloomberg Source: Supplied
CHINESE giant Yanzhou’s debt deal with its Australian interest, Yancoal, is in doubt after the Takeovers Panel ruled it needs shareholder approval.

Earlier last month Yancoal announced a $US2.3 billion ($2.8bn) debt deal that would see 78 per cent shareholder Yanzhou take on $US1.8bn of the subordinated capital note offer.

Under the offer, open to all shareholders, Yancoal would issue 2.32112 subordinated capital notes for every 100 Yancoal shares held. The notes would be treated as equity.

If the minority shareholders shun the offer, Yanzhou could increase its holding to about 98.8 per cent of Yancoal.

Minority shareholder Senrigan Capital had complained to the panel that the deal would enable Yanzhou to convert its subordinated capital notes into equity at depressed prices “so as to permit the compulsory acquisition of minorities cheaply”.

The panel ruled that the deal constituted “unacceptable circumstances”. It said to continue with the deal, Yancoal had to seek shareholder approval, excluding its majority shareholder, Yanzhou.

Yancoal said yesterday it was considering the Takeovers Panels decision and its next steps. Yancoal had previously said it believed that the application to the panel had no merit.

Senrigan, which has a stake of less than 0.6 per cent in Yancoal, had requested the offer not go ahead until the conclusion of panel proceedings, but it also sought, as an alternative, that the rights offer be made subject to shareholder approval.

Hong Kong commodities trader Noble Group has a 13.8 per cent stake in Yancoal and is understood to be unhappy with the offer.

If Noble Group, which also has a marketing agreement with Yancoal, does not take up the offer, it will be diluted to a 0.7 per cent holding in one of Australia’s largest listed pure coal plays. The trader has declined to comment on the deal.

The Takeovers Panel outlined in its ruling that the notes were a complex security that required a significant capital contribution and were unattractive to Yancoal shareholders other than Yanzhou.

“The steps taken to minimise the control effect of the rights offer are not sufficient, including the discount conversion price which exacerbates the potential control effect. And compulsory acquisition may occur at a cheaper price than would be
the case through ordinary acquisitions of shares,” the panel said.

The panel also said that Yanzhou could, from time to time, without shareholder approval, convert subordinated capital notes that allowed it to maintain, but not increase, its voting power in Yancoal.

On the recommended shareholder vote on the debt deal, the panel said at least 50 per cent of votes cast were needed to approve the deal.

[banker]

Wah say that is a positive way of looking at paying so much to acquire a blackbox that has constantly been cash flow negative only until recently.

It's one of the oldest industry and shouldn't be that complicated to understand if it stays in it's original form.

East India Company was formed with mission to pursue trade with Asian Countries. Initially, the company faced a huge competition from the already well-established Dutch East India Company. They often engaged in hostilities with their Dutch and Portuguese counterparts and later with French. In order to protect their trade, they sought support from their Sovereign. The British soldiers who came to Asia to fight with French, Dutch and guard British trade assets like factories.

After the war/settlement with their European counterparts, the company used these soldiers to eliminate the local/domestic opponents... Become rulers of this part of the world.


The commodity bull run & huge growth in global trade till 2007/2008, made these intermediary/middlemen to expand beyond their own trade. During the bull run, they were facing challenges to secure the supply by competing with their established competitors like ADM, Cargill and many new players like Wilmar... On the other hand, the upstream players like Golden Agri took the midstream and downstream into their hands.


In order to secure the upstream supply, the expanded their balancesheet ... The Gurus like Grantham and Rogers theory supported the commodity and farmland investments and money pored into these companies...

The tide is low now and de-leveraging and asset light strategy is in progress. Like East India company they cannot get Army support and SVF can invest in them on commercial terms.

I hope with these asset light strategy, they can get back to their basics. However, it is common for these merchants to engage the suppliers in the form of financing/interest free loans or by providing supplies like seeds & fertilizers in advance - meaning they cannot completely get away from these upstream activities.

On the other hand, Li & Fung expanded downstream when they faced a squeeze from big players like Walmart.. Now spinning off their brands and retail business.

I'm cautiously adding the supply chain managers

[kikababoo]

this is quite strong accusation. enron..

http://iceberg-research.com/

http://www.businesstimes.com.sg/companie...g-research

"Yancoal: How to exploit an accounting rule to fabricate profit and avoid a $603m impairment
Yancoal is a listed Australian coal miner. Noble holds a 13% interest in Yancoal and classifies the company as “associate” on its balance sheet. The carrying value of Yancoal was $678m in the 2013 annual report. It is now $614m after deducting Noble’s share of losses and impairments in 2014. The 13% stake in ASX-listed Yancoal has a market value of only $11m. In other words, there is a gap of $603m between the carrying value and the market value."

Looks forward to Noble Group's earning release at the end of this month. =) It will be quite tough for Ernst & Young to justify not taking impairment loss on this one.

Anyone has any view on this?

[specuvestor]

Yancoal is an associate not an investment, it is not required to mark to market. Impairment test is discretionary and subjective

That said, the biz model of Nobel seems far riskier than say Olam

PS u can see my discussion on Olam when it was attacked

[level13]

Yancoal is an associate not an investment, it is not required to mark to market. Impairment test is discretionary and subjective

That said, the biz model of Nobel seems far riskier than say Olam

PS u can see my discussion on Olam when it was attacked

According to the SGX rulebook:

An associate company is a company in which at least 20% but not more than 50% of its shares are held by the listed company or group.

So if we go strictly by the book, Yancoal cannot be called an associate company. That said, it will be an investment and Noble have to mark to market this investment.

One reason why short sellers and other parties like to target commodity counters is because the assets they have are very much susceptible to market forces. As a result, management will always apply their assumptions to value these assets. In some cases these assumptions are overly generous and thus making the opportunity to attack them obvious.

Auditors wouldn't be bothered. At the end of the day, they just collect their fees and put in the usual disclaimers.

[specuvestor]

The classic case is of course Hong Leong Asia consolidating China Yuchai into their books even though they only own 20%.

There has to be valid reasons for them to classify as such and for reputable auditors to agree as such blatant and obvious classification. Noble's auditor E&Y should be considered above average.

That said I agree with you that volatile asset prices makes commodity counters susceptible to this kind of "asset inflation" attacks. We should also remember the bitter war in Yancoal which Yanzhou Coal is trying to privatise and marginalise the OPMI
http://in.reuters.com/article/2014/11/10...T120141110

It's not difficult to imagine a conspiracy theory here

[corydorus]

Frankly i don't much care about SGX ruling on associate or not. The commonsense approach is that it has to be marked to market unless we think there is potential significant gain case to justify such a large gap in valuation. So i do not consider this an attack but financial information filled by iceberg that most retailers do not have knowledge/access. So it appears the valuation of Noble by the market is not in proportion and we should see natural decline in prices.

[specuvestor]

Marked to market is not a simple cure-all. If you are holding something to maturity why would you let Mr Market dictate the worth? But how much is it worth is a subjective part. Even value guys don't agree on the valuation

During a crisis we require companies esp banks mark down their assets, but someone asked a valid question: how come we don't MTM the debt as well? That has huge implication to how we perceive the impact of Mr Market. Points to ponder.

[corydorus]

Agreed which is why we need justification if there is potential gain case at least within 6 months of realization for such a large gap in valuation. This is not bond or ps where valuation will naturally returns long term as investor will get paid with expected risk + base capital returns. It seems iceberg has valid point.

[d.o.g.]

Iceberg Research's point is simply that while Noble is complying with accounting rules, the outcome defies common sense. Noble is carrying Yancoal at a value that it arrived at using certain assumptions. However Yancoal recently booked asset impairments of RMB 2bn to reflect the depressed coal price environment. Noble so far has not acknowledged the implications of these writedowns.

Common sense dictates that if Yancoal itself says its assets are impaired, then the value of Yancoal must also be impaired, which then begs the question of whether the carrying value used by Noble is still valid, and if it is not, why Noble is not writing down this carrying value accordingly.

The classic case is of course Hong Leong Asia consolidating China Yuchai into their books even though they only own 20%.

Hong Leong Asia / China Yuchai is a different case because Hong Leong Asia holds a special share that allows them to appoint a majority (6 of 11) of the directors of China Yuchai, this means they effectively control China Yuchai even if they own no other shares, therefore they consolidate China Yuchai and deduct an enormous non-controlling interest in their income statement.

Noble has no such special share at Yancoal. In fact, as Iceberg points out, Noble has no say on what happens at Yancoal, otherwise the convertible notes issue would never have been announced. The convertible notes issue required all shareholders to put up money. If only Yanzhou Coal (the controlling shareholder) subscribed and converted the notes, Yanzhou Coal would have ended up with 98.8% of Yancoal, and Noble would have been diluted from 13% to 0.7%. Noble escaped dilution only because the Australian Takeovers Panel ruled that the convertible note issue was prejudicial to minority shareholders.

Associate accounting requires some measure of influence. It is not obvious what influence Noble has at Yancoal apart from a coal marketing agreement, and in any case that marketing agreement is a business matter which is unrelated to issues of corporate control.

As usual, YMMV.