Blackfriar: Digging deep to find two sides' feelings over miner merger

UK Coal, which owns Yorkshire's biggest pit at Kellingley, is holding talks with Hargreaves Services, which owns Maltby colliery near Rotherham.

Since the news came out on Tuesday, Doncaster-based UK Coal's shares have leapt 16 per cent, closing last night at 61p.

On the surface it looks like a great deal.

UK Coal has suffered a torrid time of late. Geological problems, a fatal accident at Kellingley last year and changes in the coal face are expected to result in pre-tax losses of 115m for 2009.

But the prospect of someone with Hargreaves' pedigree coming in and working its magic on UK Coal's three remaining deep mines is an appealing one.

After all Hargreaves took over Maltby three years ago and turned it from a loss-making colliery into a viable pit.

Indeed at first sight it would make great sense for Hargreaves to boost its own coal produc-tion by hooking up with UK Coal.

At the moment Hargreaves operates across the whole carbon pipeline – it mines the coal, processes and trades it, selling it for use in sectors such as alloy production, steam railways, home and hospital heating.

So a home grown supply of coal would be a bonus.

But take a closer look. What have the shares done?

Yes UK Coal shares are up 16 per cent, but since the news emerged of the possible merger Hargreaves' shares have fallen over four per cent to 694.5p.

Investors in Hargreaves are extremely wary, to say the least, about this prospective tie-up.

Last month the group reported a surge in profits despite low coal prices and is in the process of expanding across Europe.

So why would it want to tie up with a company with such a high risk profile?

Yes, UK Coal's three mines may well be on the cusp of greatness once they start mining the new faces but until now they have underperformed.

In addition there is the worry about the group's pension deficit, which one analyst described as "a potential timebomb".

Hargreaves has a number of other opportunities, not least of all Europe, which are much lower risk.

Both sides have stressed that the talks are at a very early stage and may or may not lead to a deal.

Blackfriar suspects the latter is more likely.

Among its peers, Persimmon is something of an exception.

The York-based housebuilder remains the only major UK housebuilder not to tap shareholders for cash during the downturn.

"You can never say never," said chief executive Mike Farley in November.

"The only exception would be if we were to do a large acquisition."

Some appear to believe that time is upon us. Last week all the talk was of was smaller rival Bovis being Persimmon's acquisition target.

Yesterday it was Barratt Developments, as traders said Persimmon was mulling a bid, possibly priced around 170p.

But talk is premature according to analysts.

"Two months before an election, I would say no chance," said one analyst.

Chris Millington at Numis said buying Barratt would not make sense from a land perspective. "If you pay a premium for a housebuilder... you may as well buy land in the open market."

Perhaps so, but Blackfriar would not be surprised if this story re-emerges later this year. Persimmon has a track record of successful acquisitions, and Bovis's southern land bank would be a prized asset.

With debt down to 268m, Persimmon has the scope – and the ambition – to buy.