Aquila Resources Limited soars 37% on takeover offer: Is it too late to profit?

On Monday morning Australia’s largest rail freight operator Aurizon Holdings Ltd (ASX: AZJ), in conjunction with the Chinese state-owned iron and steel producer Boasteel, announced that they were launching a $1.1 billion all-cash takeover offer for iron ore and coal explorer Aquila Resources Limited (ASX: AQA) at $3.40 per share.

The offer price represents a premium of 38.8% to Friday’s closing price and a hefty 52.7% premium to the 12-month volume weighted average price. The move creates a few interesting opportunities for investors.

First and foremost, there is the potential to profit from engaging in takeover arbitrage. Aquila owns a resource that could be appealing to a number of other incumbents in the Pilbara, particularly those with rail infrastructure assets that may prefer to not see a new competitor enter the region such as iron ore majors, Fortescue Metals Group Limited (ASX: FMG), BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). If investors can identify a potential competing bid which may emerge or grounds for the original bid to be raised, then a case to buy Aquila shares at current levels of $3.36 could well make sense and ultimately prove profitable.

Secondly, the strategic objective behind Aurizon’s decision to take part in the proposed acquisition of Aquila is ultimately not to own the ore resource but rather “to achieve majority ownership, development and operation of multi-user port and rail infrastructure underpinning the development of the West Pilbara Iron Ore Project.” The investment metrics of Aurizon would likely be positively altered by such an outcome.

Foolish takeaway

If Aurizon is successful in its plan to build its own rail infrastructure in the Pilbara it could provide significant long-term growth for the group – investors should watch developments closely. Meanwhile for investors who accurately weigh up the risk-reward trade-off of this takeover arbitrage, there could be an opportunity for a quick, near-term profit.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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