Investing

• Felix Resources - The case for coal
• Valuing Felix Resource (FLX)
• Revising Felix Resources (FLX) fair value down

Felix was trading at $1.91 at the time of my first post in December 2005. At the time I valued Felix at around $10. Felix grew and the global energy market changed. My later valuations were around $24-$25.

Felix, today, announced the terms of a takeover proposal from Yanzhou Coal for about $18 (all amounts in AUD). Made up of $16.95 cash from Yanzhou, 5c worth of shares in a spinoff of their South Australian tenements and $1 worth of dividends.

There is a $33.3M break fee payable by Felix if any Felix director does not support the proposal, a competing proposal is accepted or there is a material breach. Yanzhou has to pay if it can’t secure financing or in the event of a material breach. This break up fee is pretty low and does not materially block another bid.

Felix directors are prevented from soliciting or encouraging other proposals, negotiating or discussing a proposal with 3rd parties and is not allowed to provide due diligence information to 3rd parties. However, if another proposal appears to be superior based on the statutory definition then directors can negotiate and share due diligence information.

The proposal has to be agreed by Felix shareholders and by 2/3rds of Yanzhou shareholders in addition to 14 other conditions including Yanzhou securing finance.

Yanzhou shareholders will be asked to approve the deal by mid-October, Felix will pay the first 50c dividend in late October. FLX shareholders will vote in early December and final consideration will be paid in late December.

Overall this is a barely adequate offer. Yanzhou are paying a small premium based on FLX recent closing price and are securing a good 75% plus upside over the next few years. Felix major shareholders are getting the opportunity to sell out together preventing the kind of debacle that happened with Macarthur Coal (where one shareholder sells a blocking stake).

Importantly the door is wide open for a serious better offer. There is plenty of time for one to materialize which gives FLX shareholders something of a floor. An offer nearer $24, would leave a reasonable 25% upside to the acquirer while paying a more reasonable price to current FLX holders.

posted by Neil  # 3:25 AM