Coked up

Peabody/Macarthur Coal: Macarthur Coal has finally succumbed to Peabody Energy and steelmaker ArcelorMittal. More than a year after Peabody first tried to buy its Australian rival, the US coal giant and its India-based partner have brought their target's steel-making coal and Asian access into their grasp with an A$4.8 billion ($5.1 billion) sweetened offer. But in the interim, the global growth outlook has dimmed. Demand will have to hold up to justify the price.

Peabody has reasons for stalking Macarthur so doggedly. The Aussie firm is a big producer of highly-prized metallurgical coal situated within easy range of the world's fastest growing markets. In addition, the deal will give Peabody, which already has operations in Australia, greater access to limited shipping terminal space. And with large reserves, Macarthur is aiming to almost double production in the coming years.

Peabody's approaches last year fell on deaf ears. But now, with Macarthur's 16 per cent owner ArcelorMittal in its corner, Macarthur's managers are finally backing a deal. It's even at the same A$16 per share that the US firm at one stage had on the table last year - though it later reduced the price it was willing to pay. But with an extra A$0.16 of dividend also on offer and more than a year of economic water under the bridge, it looks like a better deal for Macarthur and a pricier one for Peabody.

For one thing, the Australian dollar has climbed against the greenback by roughly a fifth since spring last year, raising the US dollar price of the deal. And output at Macarthur has been slow to recover from Australia's severe flooding at the turn of the year. As a result, the Peabody-ArcelorMittal price reflects an enterprise value of 9.9 times Macarthur's forecast Ebitda for 2012 - a premium to the 8.6 average for the Australian peer group, according to boutique investment bank Brean Murray, Carret & Co. Looked at another way, Peabody is handing over $17.75 per tonne for Macarthur's coal reserves, surpassing the $15 Walter Energy paid for Canada's Western Coal in December last year, according to brokerage Raymond James.

On the other hand, the price of metallurgical coal has risen substantially. But the valuation still looks generous, especially after allowing for a greater risk that global growth will stall, damaging demand and prices for steel and related coal. The changed circumstances may help explain why this time Macarthur has given in. Barring a spoiling bid from another competitor, Peabody and ArcelorMittal will get their strategic way. But for the deal to pay financially, their macroeconomic bet has to deliver.