YOUNG billionaire Nathan Tinkler is at the point of maximum pressure. On Monday, shareholders will vote on the $ 5.1 billion mega merger of Whitehaven Coal and Aston Resources that will seal his fortune. But days out, Tinkler appeared to get the death wobbles as he dumped his Newcastle Jets soccer team, was forced to deny rumours his top staff were on mandatory unpaid leave and was landed with a $ 189 million suit from one of his former managing directors, Hamish Collins.
It was more than the usual drip feed of scuttlebutt that surrounds a larger than life character such as Tinkler and raised questions about the debt behind his empire. Oddly enough for a coal baron, Tinkler has not sold a tonne of coal from a working mine.
Which compounds the problem that hardly any of his business interests, the infrastructure arm, the property development arm, the thoroughbreds, the football codes, generate cash flow. Whitehaven is a genuine coal producer and if the merger with Aston goes ahead, Tinkler will become its largest shareholder and will finally have his hands on an income generating company.
If things go to plan, proxies voted by the major shareholders in Whitehaven and Aston will have been lodged well in advance of this morning’s cut off and will be heavily in favour of the merger, despite the objections of at least one proxy adviser concerned about its most controversial aspect, the so called Boardwalk transaction.
It would be highly unusual for the fate of such a large deal as Whitehaven Aston to be determined on the floor of a general shareholder meeting. But Tinkler’s deals have a history of going right down to the wire and there will be nerves all round on Monday morning.
The Boardwalk transaction is nothing if not classic Tinkler: taking a private shelf company, stuffing it with undeveloped coal deposits, in this case, bought for as little as $ 10 and on selling them to institutional investors for a motser.
Boardwalk, 83 per cent owned by Tinkler, is poised to be sold to Whitehaven in exchange for shares worth $ 393 million and possibly up to $ 491 million. The fairytale story of Tinkler’s turn from Hunter Valley coalmine electrician at the Bengalla Mining Company to the nation’s youngest ever billionaire at the age of 35, has been well told.
Slower to emerge has been the understanding of Tinkler’s debts. In November 2006, Tinkler, then 30, with support from local business contacts including Richard Jennings and Matthew Higgins, famously sold or borrowed against everything he had, his house and his maintenance business, to scrape together a $ 1 million deposit on a neglected coal tenement at Middlemount in central Queensland, through his company Custom Mining.
He had 30 weeks to get the rest of the $ 30 million deposit together. By April, Tinkler had pulled in investors including Hong Kong listed commodities trader the Noble Group, which took 30 per cent of Middlemount. The transaction was done in June 2007 and after feasibility studies including drilling to firm up the coal quality and reserves, Tinkler’s Custom Mining was sold to Macarthur Coal for $ 65 million in cash and shares worth up to $ 210 million.
By May, Tinkler sold his Macarthur shares to Arcelor Mittal for $ 442 million. From under $ 1 million to $ 442 million in 18 months. It was a stunning deal that propelled Tinkler onto the BRW Rich 200, where he debuted aged 32 with wealth of $ 426 million and into the national spotlight as the brash ”bogannaire” who spent up big time on flash cars, big houses and particularly, his ambitious new horse racing and breeding venture, Patinack Farm.
More astounding, Tinkler got lightning to strike twice when, in November 2009, his new unlisted vehicle Aston Resources paid $ 480 million in cash for another undeveloped coal deposit, Maules Creek in the Gunnedah Basin of New South Wales, from Rio Tinto subsidiary Coal & Allied.
Coal & Allied told the market haughtily it would book an after tax profit of $ 340 million on the sale and boss Bill Champion said the Maules Creek project, did not form part of the company’s short term or medium term development plans’.
Again Tinkler had to scramble to find the money, within three months this time and now Noble was playing hardball. Aston, which had paid a $ 25 million deposit, got another $ 455 million in debt, including through warrants issued to US hedge fund Farallon, which charges interest at rates of 15 per cent or more and the Kuok Group.
With the help and connections of high profile supporters such as advertising guru John Singleton, investment banking doyen Mark Carnegie and his appointed chairman, former Nationals party leader Mark Vaile, Tinkler was able to raise enough money to pull off the Maules Creek purchase in February.
He rewarded his backers with Aston stakes that would be worth millions when it floated later that year. The Aston float itself was a close run thing, given investment markets had barely recovered from the financial crisis, but if there was one thing Asia was hungry for, it was coal and both Noble and Japanese trading house Itochu took large stakes.
Tinkler had to drop his asking price by 20 per cent, but in August Aston did float at $ 5.96 a share, giving the company a market value of $ 1.2 billion.
Four months later, in December 2010, Itochu agreed to pay a further $ 345 million for 15 per cent of Maules Creek, lifting Aston’s sharemarket value above $ 2 billion. Tinkler’s personal stake, by then about a third of Aston, was now worth more than $ 700 million.
In a rare interview, Tinkler told The Australian Financial Review that Rio’s senior executives, whom he would flown to London to see, had been, absolutely astounded, with the price he was prepared to pay for a project, Maules Creek, that was, not in their 20 year plan.
They dismissed him as an idiot who would got lucky with Middlemount. Lucky idiot, Tinkler recalled, but the lucky idiot got $ 1.2 billion for it six months later. Aston shares kept rising through the first half of last year, peaking at more than $ 11.50 and so did Tinkler’s spending.
He ploughed an estimated $ 300 million into Patinack, his non-profit Hunter Sports Group bought a 10 year licence to run A-League soccer team the Newcastle Jets for a reported $ 5 million and took over the Newcastle Knights NRL team, a $ 100 million commitment, again over ten years.
He built a $ 13.5 million beach home in Merewether. Not everything Tinkler touched turned to gold. His $ 1.6 billion bid for Queensland’s Abbot Point coal terminal was trumped by India’s Adani Group last year. A mooted $ 600 million joint venture between GPT Group and his Buildev property arm to redevelop a prime site in the Newcastle CBD was quietly shelved.
A divisive proposal by his private Hunter Ports arm to build a $ 2.5 billion coal loader on Newcastle’s former BHP steelworks site was rejected by the NSW government in January. Then there was the nuisance file. A messy $ 2 million case against one time partner Tim Sommers, founder of the failed Supercar Club which hired exotic cars to the rich.
A million dollar dispute with trainer Anthony Cummings, son of the legendary Bart, was finally settled over pasta and wine late last year, with fellow billionaire Gerry Harvey as honest broker. Crucially, Tinkler’s debts were piling up.
In October last year Tinkler’s private Boardwalk Resources Investments, sole shareholder his wife, Rebecca, struck two loan agreements with AET Structured Finance, a unit of IOOF that is thought to act as custodian for Farallon, a, featherweight, floating charge of up to $ 450 million against everything the company owned, and a mortgage over 49.5 million shares in the unlisted Boardwalk Resources, apparently worth up to $ US 63 million, $ A 60.7 million.
It is not known how far these facilities were drawn upon. By December, the AFR reported, just about everything Tinkler owned, his Aston stake, Patinack, his jet, his home, his lawnmowers, X-ray machines, jet skis and cars, was heavily mortgaged.
Meanwhile, the Maules Creek project continued to advance towards its target of first coal by mid 2013. In October, Aston had sold another 10 per cent slice, this time to Japanese utility J-Power, for $ 370 million, 60 per cent more pro rata than Itochu had paid less than a year earlier.
With takeover speculation running hot in the coal sector, as Macarthur Coal, Coal & Allied then Gloucester Coal came under offer, merger discussions between Whitehaven and Aston began in earnest. With substantial assets right next to each other in the Gunnedah Basin and transparent market valuations of both companies, Whitehaven and Aston had long been tipped as merger partners.
There would be substantial synergies from a combination. The apparent issue for Tinkler was what to do with that part of his wealth and liabilities, tied up in the unlisted Boardwalk Resources. In mid-November, Tinkler moved to seize full control of Aston, replacing Vaile as chairman, reshuffling the board and dismissing chief executive Todd Hannigan and chief financial officer Tom Todd, who each would get six months’ salary and share-based payouts of more than $ 10 million, under their contracts.
Aston shares plunged more than 20 per cent. In early December, Whitehaven confirmed it had held inconclusive talks with Aston and, a week later, a friendly, merger of equals, proposal was out. Aston’s Vaile would be chairman, Whitehaven’s respected Tony Haggarty would be managing director of a combined entity worth $ 5.1 billion.
The deal, however, was conditional on the purchase of Boardwalk Resources, 83 per cent owned by Tinkler, who would become the largest shareholder in the merged group with a 21 per cent stake. It is tricky putting a valuation on the collection of assets, including four coal projects at exploration stage, held in Boardwalk.
When the 481 page scheme document came out in March, most eyes went straight to the dollar figure: how much did Tinkler want for Boardwalk? Under the recommended deal, Whitehaven and Aston’s directors were proposing to issue Whitehaven shares worth between $ 393 million and subject to achievement of milestones such as mining leases and approvals, $ 491 million.
But the independent expert PricewaterhouseCoopers, itself relying on technical advice from MMC, valued Boardwalk at between $ 200 million and $ 330 million, well below the valuation implied by the scrip deal. PwC still came down in favour of the merger, but Boardwalk looked expensive, overvalued, in fact, by between $ 63 million and up to $ 291 million.
PwC said Aston shareholders would get $ 11.50 to $ 16.29 a share if they approved the merger with Whitehaven, but this dropped to $ 10.70 to $ 15.25 a share if the Boardwalk transaction was approved.
When the scheme documents came out, one analyst told BusinessDay: Somewhere in this document they have to convince Aston shareholders the Boardwalk transaction makes sense. That looks like it is completely missing.
Proxy adviser CGI Glass Lewis appears to have come to the same view, recommending that Whitehaven shareholders vote against the Boardwalk acquisition on Monday. In a report to its institutional clients, CGI noted that while the Boardwalk deal had some strategic merit, it just did not stack up financially and if the board believed it did, it needed to show why.
Whitehaven board objects to certain aspects of the valuation presented by PwC and MMC, CGI wrote. The board believes the valuation prepared by MMC is too narrowly focused on relative multiples of exploration expenditures and multiples of exploration targets.
CGI continued: While we understand the Whitehaven board has undertaken a thorough review of the Boardwalk assets and likely has reasonable basis for supporting the proposed purchase price, we believe that, without additional disclosure, its assessment is of limited value to shareholders.
The implied value of the proposed Boardwalk consideration far exceeds the valuations presented in the PwC opinion, the only fairness letter for Boardwalk readily available for Whitehaven shareholders to review. Instead, Whitehaven’s board has chosen to merely discount the PwC opinion and state that the value of Boardwalk is greater than PwC’s values without providing any financial analyses to support the price.
We do not believe, the board, has adequately justified the financial terms of the transaction. Rough calculations suggest Boardwalk may have paid about $ 75 million for the collection of assets it holds. A prime example of the difficulty in valuing these projects is the Dingo tenements, in the Bowen Basin, held under a joint venture between Boardwalk and a subsidiary of ASX listed junior Cockatoo Coal.
Depending on the valuation methodology used, MMC values the Dingo tenements at up to $ 55 million. But Aston’s original float prospectus shows a Tinkler entity bought Aston Dingo, which held 51 – 70 per cent of the tenements subject to spending on exploration and the farm, for $ 10, at a time when those assets were calculated to be worth less than nothing, only accumulated costs, worth minus $ 2.3 million.
Little wonder that Federal Court judge Peter Jacobson pushed Aston’s lawyers, when he was asked to convene the scheme meeting, over whether Tinkler and his fellow Boardwalk shareholders were getting a special benefit from the Boardwalk transaction.
As Justice Jacobson explained in his judgment: It might, on one view, be thought that the shareholders of Aston who also hold shares in Boardwalk could receive a collateral benefit, that is to say a benefit not available to other Aston shareholders, in the form of the consideration received from Whitehaven for their Boardwalk shares.
This question arises because the value of the consideration which Whitehaven has agreed to pay to Boardwalk shareholders exceeds the valuation range for Boardwalk, which was assessed by PwC. The judge, however, noted that corporate regulator the Australian Securities and Investments Commission had not appeared to object despite fair warning, that Tinkler, Farallon and the other Boardwalk shareholders would not be voting their shares and resolved to be practical.
What seems to be important is that, according to the material to which I was taken in the scheme booklet, the Boardwalk transaction was struck as a result of arm’s length negotiations, Justice Jacobson found. Whitehaven’s directors and 43 per cent of its shareholders, have indicated they support the Boardwalk deal.
It is all but certain to go ahead and despite the pressure Nathan Tinkler will have pulled off his third deal of a lifetime.