Australia's Macarthur Coal rejected a $3 billion bid from U.S. miner Peabody Energy Corp , saying it undervalued the growth prospects of a company that controls a third of the world's supply of a cleaner coal coveted by steelmakers.

Peabody's offer surfaced on Wednesday morning in Australia, after Macarthur disclosed it had been approached with a takeover bid. It is the latest in a flurry of coal company deals in Australia, tapping into booming demand for coal and steel from China and India.

Macarthur shares jumped as much as 20 percent following news of the Peabody offer of A$13 a share, representing a small 7.5 percent premium. Peabody shares rose 9 cents to $45.76 in afternoon trading on the New York Stock Exchange.

Peabody's proposal is highly conditional and does not fully value Macarthur and its significant growth prospects, Macarthur Chairman Keith DeLacy said in a statement.

Analyst Jeremy Sussman, of Brean Murray, Carret & Co said he believed St Louis-based Peabody, which already operates mines in Australia, might increase its offer to get a bigger foothold in the booming Asia-Pacific coal market.

He said adding Macarthur to its arsenal would certainly help investors give Peabody more credit for its Australian assets.

Thus, we think there is a good chance for Peabody to up its bid for Macarthur, in an effort to get a deal done, he added.

The offer matches the biggest recent coal deal in Australia -- Chinese company Yanzhou Coal Mining Co's <1171.HK> $2.9 billion takeover of Felix Resources last year.

Macarthur's appeal, highlighted by Peabody, is that it has 145 million tons of reserves of low-volatile PCI coal, prized by steelmakers as a way to extend the life of costly coke ovens at steel mills and reduce greenhouse gas emissions.

Peabody said it believed there is a strong strategic rationale for a combination of Macarthur's operating assets and project pipeline with Peabody's growing Australian platform of coal production.

Macarthur, Australia's second-largest independent coal miner behind New Hope Corp Ltd , is being advised by JPMorgan Chase & Co and Peabody is being advised by Rothschild .

BIG HURDLES

Peabody, the world's biggest listed coal miner, already owns nine coal operations in the Australian states of Queensland and New South Wales, which produced 22.3 million tonnes of coking and thermal coal in 2009.

Its offer is conditional on winning support from Macarthur's three major shareholders, China's CITIC Resources Holdings Ltd <1205.HK>, top global steel maker ArcelorMittal and world No. 4 steelmaker POSCO <005490.KS>, which together own 47.3 percent of Macarthur.

Peabody said it remained open to talking to Macarthur's board and was in talks with the three big shareholders. It said the three would be offered the alternative of keeping their existing stakes in Macarthur.

It is unlikely ArcelorMittal and POSCO would be willing to sell their stakes, given that they paid around A$20 a share for their stakes two years ago.

CITIC Resources, a founding shareholder in Macarthur, POSCO and ArcelorMittal declined to comment on the offer.

The offer is also conditional on Macarthur's proposed A$832 million takeover of Gloucester Coal Ltd not going ahead.

Macarthur shareholders are set to vote on April 12 on the Gloucester deal, which involves issuing shares to Gloucester's main shareholder, Singapore-listed commodities company Noble Group Ltd .

Peabody justified its A$3.3 billion offer, saying it was above the top end of an independent expert's valuation of Macarthur shares last month for the Gloucester deal, but shareholders said it was far too low.

If Peabody is serious about its intentions, I would be anticipating this is an opening gambit only, said a fund manager with shares in Macarthur, who declined to be named.

He said the bid failed to reflect sharp increases in coal prices over the past few months and escalating forecasts that have pushed some analysts' valuations of Macarthur to more than A$17 a share.

Macarthur's shares jumped to a 19-month high of A$14.50 in Australia after the announcement and closed up 16 percent at A$14.05.

(Additional reporting by James Regan in SYDNEY, Alison Leung in HONG KONG, Kim Yeon-hee in SEOUL and Michael Erman in NEW YORK; Editing by Ed Davies, Valerie Lee and Tim Dobbyn)

($1=1.089 Australian Dollar)

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