the new iron man

Article from "The Daily Mail-Beijing Review Articles"

The new iron man
Hu Yue

SINOSTEEL Corp., one of China’s largest steelmakers, has finally clinched its AU$1.36 billion ($1.31 billion) takeover of Midwest Corp., a Perth (Australia)-based iron ore miner, after a seven-month game of seesaw. On June 8, four other Midwest stakeholders accepted Sinosteel’s cash offer of AU$6.38 ($6.2) per share. Besides additional shares it snapped up from the market, Sinosteel now controls 50.97 percent of the company, surpassing the 50.1-percent threshold needed for a hostile takeover. This was the first successful hostile takeover bid by a Chinese company. In 2005, the state-owned China National Offshore Oil Corp. Ltd. attempted a hostile $18.5 billion takeover of its American rival Unocal Corp., but opposition from U.S. lawmakers thwarted the deal.

Sinosteel is currently China’s largest iron ore importer and a major supplier for many Chinese steelmakers. Its target, Midwest, is rich in small mines and has a proven iron ore reserve of around 500 million tons. Its proximity to Perth’s port further burnished its appeal to Sinosteel, which had forged joint-venture mining projects with Midwest in Australia as early as 2005. Midwest stakeholders did not hesitate to sell their shares to the Chinese company immediately after the rival bidder Murchison Metals Ltd., another Australian iron ore explorer, bowed out of its merger plan with Midwest. Observers said Murchison dropped out of the bidding race when Sinosteel accumulated more than a 45-percent holding in the Perth company. On May 26, Murchison proposed a merger with Midwest via a share swap that initially represented a 10-percent premium over Sinosteel’s cash offer. But when the shares of both the Australian miners subsequently faltered, the Chinese gained the upper hand. Observers say Midwest’s stakeholders favored Sinosteel over Murchison in part because of the certainties underlying the all-cash offer.

Behind the bid

The Midwest victory is of great significance for Sinosteel, Huang Tianwen, the company’s president, said in a public statement. “The deal will also fuel our efforts to develop Midwest’s region in west Australia into a major world-class iron ore production base,” he said. Besides this, direct ownership of Australian iron ore also could relieve China’s reliance on BHP Billiton and Rio Tinto Group, both of Melbourne, Australia, to feed its domestic steel industry’s huge need for raw materials. In 2007, China imported more than 40 percent of its iron ore from Australia, which accounted for 53 percent of Australia’s total exports.

But skyrocketing iron ore prices in international markets have dampened the prospects for Chinese importers. The average price of China’s iron ore imports edged up 71.5 percent, 19 percent and 9.5 percent year on year in 2005, 2006 and 2007, respectively. And the recently concluded iron ore price talks between China and Australian miners had forced through a whopping 96.5-percent price rise on Chinese imports from Australia. Concern about a possible BHP Billiton-Rio Tinto merger also compelled Sinosteel to speed up its plan to acquire Midwest. BHP Billiton had made clear its intention to pursue Rio Tinto early on, even though its previous proposals had been rejected twice. Because the two giants currently account for almost 40 percent of the world’s iron ore production, Asian and European steelmakers have opposed their merger, fearing that it would create a behemoth that could monopolize global iron ore supplies. Sinosteel was not alone in its efforts to lock in Australian resources. On February 1, Aluminum Corp. of China (Chinalco), the country’s largest aluminum company, teamed up with American aluminum producer Alcoa Inc. to acquire a 12-percent stake in Rio Tinto. The move was reportedly designed to block BHP Billiton’s proposal to buy Rio Tinto.

Why hostile?

Sinosteel’s acquisition bid was not hostile at first. Last December, it made an initial cash bid for Midwest at a price of AU$5.6 ($5.4) per share, which valued the target at AU$1.2 billion ($1.16 billion). Midwest, which at the time was under a takeover attempt by Murchison, had solicited an offer from Sinosteel. With Sinosteel as its white-knight bidder, Midwest scuppered Murchison’s offer, but then unexpectedly turned against the Chinese. On February 20, Midwest rejected Sinosteel’s offer, alleging that the bid undervalued its future prospects and demanded the Chinese company raise its bid price by 25 percent. Disappointed with the situation, Sinosteel took its bid directly to Midwest’s shareholders on March 14 and sweetened its cash offer to AU$6.38 per share. This move won support from Midwest’s previously reluctant board.
Observers said Sinosteel at that time had been cornered into a hostile bid out of fear that its interest in the joint ventures with Midwest might suffer if the bid fell apart. Alan Young, head of JP Morgan’s Australian arm and Sinosteel’s adviser on the deal, told Reuters that Sinosteel was forced to bypass the board and appeal directly to its shareholders, because it was clear that Midwest was not being run in the best interest of all shareholders. Sinosteel had no alternative but to fight the protracted bidding war to a finish, Yu Tiecheng, Chairman of Shanghai Tide Investment Consulting Co. Ltd., told the 21st Century Business Herald. “It pays to gain a controlling stake in Midwest, which has potential to boost its iron ore reserves,” Yu said. “But Sinosteel may be challenged in subsequent integrations, because the hostile bid may leave Midwest’s employees averse to the Chinese side.”

Not always easy

It is widely believed in the industry that Sinosteel’s success will prompt other Chinese companies to follow suit. But some say they will continue to encounter problems when they pursue overseas investments. After Chinalco bought Rio Tinto, Australia’s Foreign Investment Review Board (FIRB) tightened its scrutiny of foreign investment bids, fearing that the country’s national resources would fall under control of others. Sinosteel’s application to raise its stake in Murchison, for instance, was delayed by the FIRB for three months. Joint venture proposals by other Chinese companies, including Shougang Group and Anshan Iron and Steel Group, were also shelved by the FIRB. In response to the concerns, Australian Federal Treasurer Wayne Swan recently told the local press that Australia’s doors are open to all foreign investments in line with its national interests, including those from China.

He said examining foreign investment proposals closely has taken time, especially with the many investment bids Australia has received from Chinese companies in recent years. According to a recent report by Xinhua News Agency, China’s foreign direct investment (FDI) in Australia surpassed AU$30 billion ($29 billion) from June 2007 to June 2008, while its FDI in the previous two fiscal years amounted to around AU$10 billion ($9.6 billion) in total. Chinese industry observers caution that once global iron ore prices drop, Sinosteel will suffer, because its mining costs in Australia are two to three times more than those of local miners such as BHP Billiton and Rio Tinto. Recent actions by the Japanese have also added to suspicions clouding the merger. While Chinese companies jostle for overseas investments, the Japanese, despite an even higher reliance on imports, have been doing the opposite. Savvy Japanese investors in recent years have remained aloof from the iron ore buying craze of their Chinese counterparts. Japanese steelmaker Mitsui & Co. Ltd., for instance, sold its 51-percent holding in Indian iron ore miner SesaGoa Ltd. last year for $1.9 billion.
But Li Xinchuang, Deputy Director of the China Metallurgical Industrial Planning and Research Institute, is of a different mind. He told China Times that even if the global demand for steel becomes anemic, the buoyant domestic market would still be hungry for foreign steel products. Besides this, the prices of resource-based products such as steel are bound to increase in the long run on the back of booming steel industries in emerging markets, he added.

More on the way

Sinosteel President Huang Tianwen told China Times that the Midwest takeover marked a high point in his company’s ongoing plans for foreign acquisitions. Sinosteel was the first Chinese concern to participate in overseas mining projects. In 1988, it collaborated with local companies to develop the Channar Iron Mine in the Pilbara region of west Australia. “We have been committed to supporting the Australian mining industry for over 20 years no matter how good or bad the market was,” Huang said. Huang also said Sinosteel would help upgrade Midwest’s infrastructure and technology. He noted that the company would be a large corporate taxpayer in the mining area and bring more employment opportunities.

Outside Australia, Sinosteel has invested in Africa, Europe and Southeast Asia, where it has set up 23 subsidiaries. According to Huang, the overseas revenue of Sinosteel is expected to account for half of its total revenue to justify its status as an international giant. Of the company’s 123.5 billion yuan ($17.6 billion) revenue in 2007, about 40 percent was generated overseas, he added.