Australia’s Bradken Rejects Another Private Equity Bid


April 7, 2015

Australia’s mining equipment and machinery maker Bradken has turned down a $325 million (A$428m) offer by private equity firm Pacific Equity Partners and Koch Industries. This isn’t the first time the company has turned down a private equity offer in the recent months and the move is another strong indicator of how much the mining and natural resource sector is currently suffering.


The combined bid by Pacific Equity Partners and Koch industries was another bid in a string of efforts to buy the company. The firms made the previous bid in December when they offered a much higher price at $662 million (A$872m). The most recent bid was thus almost half of the previous bid, indicating that Australia’s mining industry is currently under a lot of pressure.


Declining the Deal
The latest effort by the two firms was worth $325 million and would have priced the shares at A$2.50 per share. Bradken’s representatives told the Financial Times on Thursday that the private equity firm bid “does not represent fair value” and that the board has made the decision “not to engage further”. Although it might seem like the company just closed the door for any further deal making, considering this isn’t the first such rejection in recent months, many analysts believe the company might be after a sweeter deal instead of a total rejection of a possible takeover.


Morningstar analyst, Ross MacMillan, told Reuters, “If (Bradken) did receive a bid that was more like $3.50, you’d have to think it would be worth having a think about, considering the market could languish at these subdued levels for the next three to five years”.


Drop in Commodity Prices
The valuation by Pacific Equity Partners and Koch Industries doesn’t come as a surprise considering the slump the mining industry is currently faced with. Data from the Steel Index, a price reporting agency, reveals the price of iron ore has hit the lowest levels since the records began in 2008. Iron ore’s price stood at $50 at its lowest this week. The price decline started last year, as demand in China declined and slashed the prices almost by half. This year has seen a further 30% decrease in the global iron ore price.


Furthermore, other natural resources are going through the same struggle. Thermal coal, the form of coal used in power plants for creating energy, has seen its price halved from its peak in 2011. Mr MacMillan was quoted in the Financial Times saying that in this light, “it’s not surprising Bradken’s offer price has fallen” and that “the bid offer looks opportunistic, but clearly private equity is struggling to value assets given the volatile market”.


Bradken is not Struggling Alone
Bradken isn’t the only mining company in the global scene struggling with the declining prices. Rio Tinto announced hundreds of job cuts last month in an effort to cut down costs by $750 million in 2015. Other companies such as BHP Billiton and Glencore have also said they need to axe jobs to reduce capital expenditure.


Australia’s third largest iron ore miner, Fortescue, needs to find a way to refinance its $7.5 billion net debt. This might open up an opportunity for private equity firms to buy a stake in the mines, as Deutsche Bank has warned Fortescue it may be its only option to raise equity if the iron ore prices continue to fall and stay low in the next few months.


According to the Financial Times, the bank said, “Fortescue remains in tough position with the falling iron ore price outpacing the fall in costs and capex”. Furthermore, it is the smaller firms, which are hit the hardest. Many small mining companies are currently operating at a loss, because production costs and debt servicing costs are much higher the smaller the firm.


Bradken’s Multiple Offers
Private equity is still relatively interested in the mining sector, although some investors are quite wary of the prices. The Mining Technology website quoted the IG market strategist, Evan Lucas, telling he believes “the company (Bradken) is a ‘distressed asset’ and a suitable target for private equity firms”.


In fact, the private equity firm, Pacific Equity Partners, has made a number of bids to acquire the company. The firm teamed up with private equity firm, Bain Capital, last August, when it offered A$1 billion for the company. That offer of A$6 per share was lowered to A$5.10 per share in December, but the bid was eventually pulled off as the industry volatility scared some investors. The December deal had gone through all the way to due diligence process but investors got cold feet at the final minute.


Reuters was able to get confirmation from Koch Industry representatives, who said the firm would continue talks with Bradken. Pacific Equity Industry has not outlined its future plans regarding the deal. Mr MacMillan told the Financial Times buyers need to be very careful in these conditions and think hard about possible bids for these struggling companies. “The big question for prospective buyers is are we getting close to the bottom of the mining downturn? The boom lasted a decade so we could have another three to five years of tough conditions,” he said.


What Will Happen?
It remains to be seen what the company and, indeed, the private equity firms decide to do in the future. According to Reuters’ sources, the two firms had the financing ready if the deal would have gone through and as we’ve seen, Koch Industries is still willing to find a way to continue talks.


The firm is currently involved in the fertiliser industry in Australia, so this would be the first deal for the firm in the mining sector in the country. Bradken is the biggest supplier of equipment for the sector and the company would see its profits rise back again if the commodity prices were to pick up in the coming months. Many experts don’t see an immediate rise in the horizon, but private equity firms might still be keen to get into the sector. The next few months will be an interesting time for the industry.


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