Could Qube merge with Aurizon?

An Aurizon coal train. Picture: Kevin Farmer

Could a $13 billion-plus tie-up between logistics companies Qube and Aurizon be the next major mega merger on the agenda?

Woodside’s $38.5bn merger deal with BHP’s petroleum unit and the $22bn proposed deal to bring together oil and gas companies Santos and Oil Search have many in the market turning their mind to what other industry consolidation makes sense.

Qube reports its results next Thursday, and a line of questioning is expected to be what it will do with the cash it received from asset sales.

Qube sold a stake in its warehouse and property unit at Sydney’s Moorebank this year to Logos for $1.65bn, which was above its $1bn book value.

Also taking into account the proceeds it received from the sale of properties in Sydney’s Minto, Qube has $800m of cash currently sitting on its balance sheet and is debt-free.

The situation is a talking point among analysts in the sector, with possible outcomes for the extra cash being a capital return to shareholders or corporate activity.

Merging with Aurizon is seen by some to make sense, creating a transportation giant.

Both parties are eager to increase their scale and have balance sheets that can accommodate deal activity.

Yet some say that the deal could be more appealing for Aurizon than Qube, which may not want the coal exposure, and may need some convincing to take on business with an aspect unappealing to institutional investors.

Should Qube be open to the idea, the expectation is that it would lead any transaction, given it trades at a higher earnings multiple, allowing for more growth.

The opportunity for Aurizon would be that a merger with Qube would reduce the proportion of earnings it generates from coal, making the business more appealing to environmentally friendly investors.

There is also the matter of the Australian Competition and Consumer Commission, although a transaction is not an impossibility from a competition watchdog perspective.

Qube has worked with UBS in the past so the thinking is that if any transaction was to transpire, it would involve the Swiss bank and potentially Barrenjoey Capital, launched with former UBS staff.

Aurizon’s result delivered last Monday showed earnings and sales growth have been flat over the past year, as it delivered $607m annual net profit.

Of its overall earnings before interest, tax, depreciation and amortisation, it generated $533m from coal haulage, $140m from its bulk port operation, which it hopes to grow, and $849m from its network business.

It has hopes of generating between $1.4bn and $1.5bn of EBITDA this financial year.

The other mooted merger related to coal is a tie-up between listed coal miners New Hope Group and Whitehaven Coal.

But it is understood that New Hope is more motivated for a transaction than Whitehaven, given that Whitehaven is not keen to gain a greater number of thermal coal assets – the most out of favour with the increasingly growing number of environmentally friendly institutional investors.