Glencore acquistion of Coal&Allied should be value-accretive, HSBC says

Just a few weeks after submitting an offer for US rival Bunge, the commodity trader had offered an initial $2.05bn for Rio's stake in C&A plus five annual cash payments of $100.0m. It also bid for Mitsubishi's stake, proposing an initial payment of $920.0m together with four annual payments of $100.0m.

However, on a stand-alone basis the investment bank said C&A had a value of $3.4bn. Hence, once cost synergies were factored-in it should create value, analysts David Pleming and Derryn Maade said in a research note.

Furthermore, their suspicion was that Glencore in fact held a more optimistic view of long-term coal pricing. Should coal prices rise 10% from their then current level, the valuation of C&A would increase by 10%.

To boot, Glencore was expected to either sell down up to half of its C&A acquisition or some of its lower quality coal assets, for no less than $1.5bn.

The outfit had also pledged not to exceed its upper limit guidance of $15.5bn for net debt.

That, they said, "should be easily attainable", pointing out that excluding the current transaction net debt was seen at about $10.0bn at the end of 2017, leaving the door open to further acquisitions and/or special dividends.

The only drawback was that Glencore needed to give Yancoal, which had submitted a rival bid for C&A, time to make a counter-offer, meaning there was no certainty its own would be accepted before it expired on 27 June.

HSBC kept its recommendation on Glencore at a 'buy' with a target price of 390.0p.