Bryan Frith has done some homework. But he doesn't provide any...

Bryan Frith has done some homework. But he doesn't provide any evidence for his assertion that the yilgarn tender is more advanced than Mitsubishi's.

Meanwhile the closer we get to may 9 without resolution of the mis/sino/yilgarn quarrel the more mmx sp is likely to rise.

Midwest appears to be stalling
Font Size:DecreaseIncreasePrint Page:Print
Bryan Frith | April 18, 2008

CHINA'S state-owned Sinosteel perhaps should consider applying for a declaration of unacceptable circumstances from the Takeovers Panel over Midwest Corp's proposal to seek shareholder approval to nominate Yilgarn Infrastructure as its partner to build the $3 billion port and rail facilities for WA's Mid-West iron ore region. The move could be seen as a frustrating action designed to defeat a takeover bid.

Such an application would be unusual. Generally, the panel views obtaining shareholder approval as a way to overcome any frustrating action issue.

In Midwest's case it would be the shareholder's meeting itself that would be the issue. Midwest is required to nominate its infrastructure partner to the WA Department of Planning and Infrastructure by May 9, but a shareholder meeting cannot be held until after that date.

Midwest says it can "effectively" nominate Yilgarn, subject to shareholder approval and that it's sure the department will understand this process has been forced upon it by Sinosteel.

But it creates considerable uncertainty, and if Midwest were to overplay its hand and miss out on securing Yilgarn to build the infrastructure, that could jeopardise the bid.

Midwest, and the major shareholders who appear to call the shots, have so much to lose from such an outcome that it's hard to believe it will be allowed to happen.

Midwest says its action on Yilgarn has nothing to do with the unwelcome takeover bid from Sinosteel, but that's difficult to accept. It smacks of a tactic to put pressure on Sinosteel.

Midwest and Yilgarn in September signed an infrastructure agreement that requires both to work towards an agreement to develop rail and port infrastructure for the emerging Mid-West iron ore industry. The agreement binds Midwest to deal exclusively with Yilgarn.

In turn, Yilgarn had signed an investment agreement with five major Chinese enterprises to put up half of the estimated $750 million equity needed for the project. China's Exim bank had agreed to provide the debt.

Sinosteel is a potential equity shareholder and would acquire 12 per cent of Yilgarn.

The WA Government has given two companies, Midwest and Murchison Metals, the right to competitively tender for the infrastructure contract, and they have until May 9 to nominate their infrastructure partner.

Murchison has nominated Japan's Mitsubishi and Midwest was expected to have nominated Yilgarn by now, but Midwest claims Yilgarn and Sinosteel are associated and it therefore needs the approval of shareholders under the ASX rules relating to "transactions with persons in a position of influence".

Last December Midwest announced that it had received an incomplete proposal from Sinosteel for a cash offer of $5.60 a share, which was well above the price being offered by Murchison. In late January Sinosteel moved into the market and snapped up 19 per cent of Midwest.

Days later, Murchison allowed its bid to lapse, followed by an announcement from Midwest that it had been unable to come to terms with Sinosteel and considered that an offer of $5.60 a share would undervalue the company.

It was thought that would be the end of the matter and a state-owned Chinese entity wouldn't be prepared to mount a hostile bid, but in mid-March Sinosteel broke new ground by announcing a hostile bid at the same price -- $5.60 a share.

Sinosteel's action appears to have surprised Midwest and relations with the Chinese company have soured from that point.

The ASX listing rules require prior shareholder approval if a company proposes to dispose of a substantial asset (5 per cent of shareholders' funds, or $7 million) to an associate of a substantial shareholder.

Sinosteel is a substantial shareholder of Midwest, and Midwest says Sinosteel is "promoting" Yilgarn as the infrastructure provider for the Mid-West region, which means Sinosteel and Yilgarn are associates and the nomination of Yilgarn as its infrastructure partner, together with the finalisation of the implementation agreement, are transactions that would amount to the disposal of a substantial asset, requiring shareholder approval.

Midwest says it will appoint an independent expert to value those two transactions and to rule on whether they amount to at least $7 million, and would be in the interests of the shareholders other than Sinosteel and its associates.

The ASX is waiting on those valuations to see whether the meeting may be required.

Midwest has provided nothing to back up its assertion of association. According to the Corporations Act, for an association to exist the parties must have an agreement for the purpose of controlling a board or its affairs, or be acting in concert concerning the company's affairs.

Sinosteel is not yet a shareholder, but the fact that it is prepared to be, and that it favours Yilgarn as the infrastructure provider, does not of itself mean that it is acting in concert with Yilgarn.

It's not surprising that Sinosteel would support Yilgarn, as it has spent $25 million in the past six months on its project. It has completed engineering studies and has also completed full legal, financial and commercial modelling and appears to be far more advanced than Mitsubishi.

Midwest should be well aware of the association provisions. There have long been suggestions that Midwest is effectively controlled by the deputy chairman David Law Tien Seng and a number of Malaysia-Chinese shareholders, who are said to speak for about 45 per cent of the company, in aggregate.

Recent tracing notices by the corporate regulator ASIC flushed out the ownership of some of those holdings and confirmed that there had been prior contraventions of the substantial shareholding disclosure provisions, but in each case the parties insisted they were not associates and had acted on their own initiative.

There's also the question as to whether Yilgarn would be disposing of a "substantial" asset. The nomination of Yilgarn would only give it a right to participate in a tender without any assurance that the tender will succeed.

Midwest paid nothing for that nomination right (perhaps the department should have charged the company) and it is arguable that the right has already passed to Yilgarn. Midwest is yet to set a date for a shareholder meeting, or even to appoint an independent expert, and claims that it is unable to do so until Yilgarn provides details, such as carriage and freight rates, before an expert would be able to value the agreement.

Midwest also has to provide details such as a mine development plan and tonnages to be carried, and is yet to do. In fact, Midwest earlier this month extended the deadline for completing its pre-feasibility study from September until December.

That timetable suggests a valuation of the implementation agreement at this stage would be premature.

It seems probable that, in the circumstances, the ASX would have been prepared to grant a waiver and arguably that would be in the interests of Midwest shareholders. Midwest's failure to seek a waiver calls into question its motives.