TP05/046
The Panel announces that it has declined to make a declaration of unacceptable circumstances in relation to the application Glencore International AG and a company controlled by Glencore, Fornax Investments Ltd (together Glencore), in relation to the affairs of Austral Coal Ltd (Austral Coal) and the scrip takeover offer for Austral by Centennial Coal Company Ltd. (Centennial).
Summary
On 29 April 2005, Centennial announced as part of its quarterly report for the March 2005 quarter that its Munmorah coal mine (Munmorah) would be closed in August 2005. Glencore in its Application alleged that unacceptable circumstances existed in that Centennial had knowledge of the decision to close, or likelihood of a decision to close, Munmorah before this time, that this was information which was material to the value of Centennial shares and that, therefore, this information should have been disclosed to Austral shareholders at the time it became known.
The Panel considered that the decision by the directors of Centennial to close Munmorah was not material to the decision by the shareholders of Austral Coal in deciding whether or not to accept the 10 for 37 scrip takeover bid by Centennial. The Panel therefore considered that the absence of disclosure in the Centennial bidder's statement or any supplementary statement of the possibility that Centennial may close Munmorah, or an actual decision of the board of Centennial to close Munmorah, before the closure was announced in Centennial's third quarter results on 29 April 2004 (29 April Announcement), did not constitute unacceptable circumstances.
The Panel noted Glencore's submissions as to the fall in price of Centennial shares in the days immediately after the 29 April Announcement. However, the Panel noted the submissions of Centennial as to the financial effects of, and the materiality of, Munmorah on Centennial, both prior to the decision to close, and as a consequence of the decision to close the mine. The Panel also noted the price recovery of Centennial shares in the short period after the 29 April Announcement.
While not directly necessary for the Panel's decision, the Panel considers it likely that the sharp fall in price following the 29 April Announcement and the subsequent rise were more reflective of the incomplete disclosure of the effects of the closure on Centennial in the 29 April Announcement than of the materiality of the announcement.
In this regard, the Panel notes the advices given by Centennial in its submissions to the effect that
- the Munmorah loss of $21.6 million as detailed in the Quarterly Activities Report released on 29 April 2005 (the Quarterly Activities Report) was pre-tax and comprised:
- $4.9 million expected cash operating loss for 2005;
- $2.8 million of depreciation for 2005;
- $13.9 million of one-off costs ($9.7 million after tax) associated with poor mine performance (purchased coal) or closure of the mine (this includes the carrying value of the Munmorah mine, which was $2.7 million and was non-cash); and
- $7.8 million of this loss had already been included in profits for the 6 months to 31 December 2004. The one-off Munmorah cash costs of $11.2 million ($7.8 million after tax) are equivalent to 2.9 cents per Centennial share; and
- Munmorah represented less than 1% of Centennial's reserves and less than 5% of Centennial's revenue for the first half of its financial year ending 30 June 2005. The carrying value of Munmorah was 0.15% of Centennial's market capitalization; and
- Munmorah's earnings and cash flow were negative to at best break even; and
- after the initial market overreaction, Centennial's share price recovered to $4.94 compared with $4.87 immediately prior to the announcement of the closure of Munmorah.
The Panel noted the Centennial share price movement of $0.40 in the days immediately after the 29 April Announcement. However, the Panel was of the view that an assessment of the materiality of the decision to close Munmorah for the decision by an Austral Coal offeree was more appropriately done by assessment of the effect of the closure on the long term value of Centennial. Also, the Panel noted Centennial's submissions concerning market reactions to earnings downgrades at the relevant time.
On the basis that closure of Munmorah was not material to the decision of Austral Coal shareholders, any lack of disclosure in relation to the prospect of the closure did not constitute unacceptable circumstances.
In saying this, the Panel notes the assertions by Centennial that, with better explanation, the market and analysts considered that the closure of Munmorah did not have a material adverse effect on the value of Centennial. The Panel also notes that the operating losses which Centennial advised the Panel that Munmorah had been making in the first half of the financial year ending 30 June 2005 equalled close to 5% of Centennial's EBITDA (and were, on that basis, disproportionate to its value to Centennial). On that basis, the disclosure relating to Munmorah and the benefits associated with its closure, both prior to and in, the 29 April Announcement, may have been better.
Issues Considered by the Panel
Materiality of Munmorah
The allegations made by Glencore in its application included an allegation that Centennial withheld from the market information regarding the closure of Munmorah when it should have disclosed that information and/or previously released information to the market which was misleading. The requirements to include information in a bidder's statement relate to the materiality of the information to the decision by shareholders of the target company and to whether or not the market for shares in the target company is efficient informed and competitive.
If the value of Munmorah was immaterial to the value of Centennial shares, or if information concerning Munmorah would not be likely to affect the decision of Austral Coal shareholders in determining whether or not to accept the Centennial offer, then Centennial had no obligation to make any disclosure about Munmorah in the context of its bid.
Centennial provided to the Panel and the other parties a range of measurements of Munmorah's value and contribution to Centennial.
The Panel considered that the value of Munmorah (including closure costs, and the mine's prospects) was not material to the value of Centennial shares at the time Centennial made its offers for Austral Coal.
The Panel accepted Centennial's submissions that Munmorah had been neutral or negative in terms of profit and cash flow to Centennial and that the closure of Munmorah would not be adverse, and may be positive to the value of Centennial shares beyond FY 2005. On that basis, the Panel considered that any Austral Coal shareholder who had decided to accept the Centennial bid would not have reversed that decision if they had been given detailed information about Munmorah and the effect of its closure on the long term value of Centennial. Indeed, some may have been more inclined to accept the offer rather than less.
The Panel accepted the analysis provided by Centennial in paragraph 4(b) on page 6 of its submissions as to the materiality of the costs of closure of Munmorah to the value of Centennial shares.
The Panel considered that the relevant criteria the Panel should use to assess the materiality of Munmorah to the value of Centennial shares, and to the decision of Austral Coal whether or not to accept the Centennial bid was the effect on the balance sheet and future profitability of Centennial of the closure of Munmorah. The Panel did not accept that the short term market price movements of the price of Centennial shares was the appropriate criterion.
The Panel considered that there was other information content in the 29 April Announcement which could have also been an explanation for the market movement of Centennial shares immediately after the 29 April announcement. Therefore, it was not reasonable to ascribe the change in market price of Centennial shares after the 29 April Announcement solely to the announcement of the future closure of Munmorah. The Panel also noted the general market conditions at the time of the 29 April announcement, which may have contributed to the immediate impact on the price of Centennial shares.
Centennial's Knowledge About Munmorah
Glencore has alleged that Centennial had knowledge of the prospects of closure of Munmorah prior to the 29 April Announcement.
If Centennial had withheld material information concerning the prospects of Munmorah prior to the lodging of its bidder's statement on 9 March, which it did not disclose until the 29 April Announcement, and the effect of closing Munmorah was material to the value of Centennial shares, that may have constituted unacceptable circumstances.
Similarly, if Centennial had material information concerning the prospects of closing Munmorah, after lodging its bidder's statement on 9 March but prior to the 29 April Announcement, which it did not disclose until the 29 April statement, and the effect of closing Munmorah was material to the value of Centennial shares, that may also constitute unacceptable circumstances. However, both of these analyses are based on the assumption that the closure of Munmorah was information which was material to the decision of Austral Coal shareholders.
Given that the Panel has concluded that the decision to close Munmorah was not material to the decision of the Austral Coal shareholders, the important aspect of the state of knowledge of the directors of Centennial was whether they had reasonably concluded that the operations of Munmorah and its closure, or potential closure, was not material to the value of Centennial shares.
Centennial's Disclosure About Munmorah
It was generally conceded that there had been no disclosure of information in the Centennial bidder's statement concerning the possibility of closure of Munmorah.
The fact that there was to be a review of the operations of Munmorah was disclosed in the December 2004 Quarterly Report with a statement that "All options are currently being reviewed". However, it is noted that this disclosure was not made specifically to Austral Coal shareholders.
However, given the Panel's decision in relation to the materiality of the Munmorah closure on the decision of Austral Coal shareholders, the lack of disclosure specifically to Austral shareholders concerning Munmorah's potential closure did not constitute unacceptable circumstances.
The Panel noted Centennial's submission to the Panel that the decision to close Munmorah had been made by the directors of Centennial at a board meeting on 28 April 2005, the day before Centennial disclosed it in its Quarterly report for the third quarter of 2004/05, i.e. the 29 April Announcement. The Panel did not reject Centennial's submissions as to when the decision to close Munmorah was made and the process leading to that decision.
Relevance of "Proved Reserves"
Glencore alleged that by reporting, both prior and during the takeover bid, that Munmorah contained "Proved Reserves", Centennial had compounded the omission of information in the bidder's statement.
The Panel accepted Centennial's submissions that there is no accepted industry practice for, and the JORC Code does not require, a company to make statements downgrading a mineralisation resource based on changing information on the economic feasibility of mining, extracting or processing the product of a mine. The Panel accepted Centennial's submissions that because Munmorah's reserves at 4.6 million tonnes represented less than 1% of Centennial's reserves of 480.5 million tonnes (excluding Austral Coal's resources), an announcement in the next periodic report was appropriate, which is what Centennial submitted it was intending to do, and did.
Glencore Takeover Plans
Glencore submitted that it was seriously contemplating making a takeover bid for Austral Coal prior to the rapid acceptance of the Centennial offer in early April 2005. It submitted that the failure of Centennial to disclose the closure, or potential closure, of Munmorah in the Centennial bidder's statement and during that period of early April 2005, meant that Glencore's ability to make a takeover bid was thwarted.
Glencore submitted that it constituted unacceptable circumstances for the potential for a rival bid to be thwarted by inadequate disclosure of material information. Glencore set out the timing of its preparations for making its own takeover bid for Austral Coal, at a minimum price of $1.40 per Austral Coal share.
The Panel did not reject Glencore's submissions as to its preparations for a possible takeover bid for Austral Coal.
However, once the Panel determined that the information concerning the closure, or potential closure of Munmorah was not material to the decision of Austral Coal shareholders, the timing of that disclosure was no longer relevant to the success or failure of Glencore's intention to make a takeover bid for Austral Coal.
Form of Disclosure of Munmorah Closure
Glencore has alleged that the disclosure of the Munmorah closure should have been made in a supplementary bidder's statement rather than solely in a quarterly production and operations report by Centennial.
Given the materiality of the Munmorah closure to the decision of Austral Coal shareholders, the Panel considered that the method of disclosure of the information was adequate.
Orders
Given the Panel's decision not to make a declaration of unacceptable circumstances, it made no orders.
Panel
The sitting Panel for these proceedings was Guy Alexander, Hamish Douglass and Meredith Hellicar.
The Panel will publish its reasons for the decision on the Panel's website.
Nigel Morris
Director, Takeovers Panel
Level 47, 80 Collins Street
Melbourne, VIC 3000
Ph: +61 3 9655 3501
