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In the latest move by Chinese companies to get their hands on natural resources, a Chinese private equity firm, Cathay Fortune, is offering A$830 million ($848 million) for control of Discovery Metals, an Australian copper producer with mines in Botswana.
The deal calls for Cathay Fortune to take 75% and China-Africa Development Fund to control 25% as they acquire all of the ordinary shares of Discovery Metals for A$1.70 a share in cash, or approximately A$830 million in equity value and A$947 million in enterprise value. Cathay Fortune currently owns 13.7% of the ordinary shares of Discovery Metals. The offer price represents a 51% premium to the 20-day VWAP of Discovery Metals as of October 3.
Discovery Metals is an Australian Stock Exchange/Botswana Stock Exchange listed copper exploration and production company focused on the emerging Kalahari Copperbelt in north-west Botswana, and is a copper producer at its 100%-owned Boseto Copper Project.
The transaction is not subject to financing, as the cash consideration will be funded by a term loan facility of up to $600 million to be provided by China Development Bank, and cash and available liquidity of Cathay Fortune and the China-Africa Development Fund, which have both received approval from China’s National Development and Reform Commission.
Cathay Fortune has also received approval from Australia’s Foreign Investment Review Board with respect to the transaction.
Cathay Fortune is a Shanghai-based private equity firm founded by billionaire Yu Yong that manages a portfolio valued in excess of $3 billion, and owns 35% of China Molybdenum, the fourth largest molybdenum producer in the world.
The China-Africa Development Fund is focused on Chinese investment in Africa, with funding of $3 billion that has been provided by China Development Bank.
Citi is acting as financial adviser to Cathay Fortune, and UBS is acting as financial adviser to Discovery Metals in connection with the transaction.
Arrium
Cathay Fortune isn’t alone in looking for buying opportunities. In late September steel and iron-ore producer Arrium fended off a takeover bid from a foreign consortium led by Korean steel giant Posco and Hong Kong commodities group Noble.
“You will see more M&A activity in the commodities sector because of softening prices,” said Colin Banfield, Citi’s head of Asia-Pacific M&A. “There are quite a few M&A deals bubbling around as a result.”
The consortium offered 75 cents for each Arrium share on September 28, but that was rejected by an Arrium board that said the bid was seeking to take advantage of a temporary slump in iron ore prices.
The benchmark iron ore price was $104 a tonne during the week of the offer, well below the $130 and $150 a tonne range it has been in for most of the past year.
The consortium argued the slump in iron ore prices was not temporary, and their bid reflected a realistic judgment of where iron ore prices are going.
“Given the real disagreement around pricing right now, it’s tough to call how this deal will end up, but you can be sure this isn’t the end of the story,” said a banker.
Indeed, Banfield added that there will be “more deals of this nature, more take-privates and more sponsor activity in Australia in the coming year”.
And you can bet a lot will involve China in its bid for more resources.
On September 18, China’s Meijin Energy Group offered A$435 million ($455 million) cash for Adelaide-based Western Desert Resources (WDR). The Shanxi-based producer’s offer represented a 50% premium to WDR’s 30-day share price average, making it an attractive offer for the Australian company. It would give China’s largest private coke producer access to iron ore, gold, copper and uranium deposits in Australia’s in Northern Territory, which it needs to expand. That deal is subject to government and regulatory approvals in Australia and China.
Chinese bidders are becoming far more adept at successfully executing Australian public M&A, noted law firm Herbert Smith Freehills in a recent M&A report. The success rate for Chinese bidders reached 83% in 2012 (as opposed to 57% in 2011).
