Hostile Or Not, Peabody Has Aussie Drama

Todd Shriber
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Forgive me for ascribing the word ''drama'' to the energy sector in a way that only someone far younger than I would do, but the energy patch can be quite dramatic. Whether its a major takeover, fatal accidents and spills or some stuff straight out of Hollywood at the hands of militant rebels, the energy sector does not lack for compelling headlines or drama.

The drama is often reserved for locations that are widely known to be risky to do business in. Africa, select parts of Latin America and other corners of the globe that coming with the emerging markets tag. Yet Peabody Energy, the largest U.S. coal producer, is getting all the drama it can handle in Australia, obviously a developed market.

The Missouri-based company is heavily attracted to Australia's Macarthur Coal, the world's largest maker of pulverized coal. To the American company's credit, it may once bitten, but it certainly is not twice shy. Peabody (BTU) tried to acquire Macarthur last year for $3.4 billion on its own, but was sent packing. This time around, Peabody is teaming with ArcelorMittal (MT), Macarthur's second-largest shareholder, in a $5.2 billion bid for the Aussie firm.

To say this deal means a lot to Peabody is an understatement. While the company has the only noteworthy presence in Australia among U.S. coal producers, it surely realizes that if it is to exploit the coal super cycle it so frequently touts, it needs to widen its Australian footprint. In real estate, it is all about location, location, location. The coal business is very similar. Look at a map and Australia has location, location, location. That means proximity to China, India and other emerging market friends.

Peabody and ArcelorMittal are not messing around. After talks with Macarthur management took a turn for the worse, the two bidders took their offer directly to Macarthur investors. That should mark the start of a hostile bid, but Macarthur management does not view it as such. The company said early Tuesday that it is continuing to pursue alternative bids to the one offered up by Peabody and ArcelorMittal, but that is risky proposition in its own right.

While Macarthur surely makes for an attractive takeover target, the only public bid is Peabody's. There has been some speculation that Rio Tinto (RIO) or China's Yanzhou Coal (YZC) could make a move on Macarthur, but to this point, it is just that: Speculation.

What this amounts to is Macarthur playing a dangerous game of chicken because there is a good chance that no competing offer to Peabody's is in the works or will emerge. The drama is heightened by the fact that Peabody really cannot call Macarthur's bluff because the latter knows the former is enamored by it.

Typically, M&A buffs need more than $5 billion or so to get their juices flowing, but if you are looking for a cure to summertime market news doldrums, Australia's coal drama may just be the elixir.

Todd Shriber