Chinese state-owned Baosteel has revised its request for proposals for a one-year bridge loan to fund its acquisition of Australia-listed Aquila Resources.
According to one source familiar with the matter, the steel maker initially asked banks to submit proposals for a A$600 million-equivalent US dollar-denominated loan but later cut that to A$300 million-equivalent as it was unsure whether banks would be willing to extend the bigger amount.
The revised proposals are due at the end of this week.
Baosteel, together with Australia’s bulk rail freight operator Aurizon, have jointly bid for all the shares of iron ore and coal-focused Aquila Resources, valuing the company at about A$1.4 billion.
The bid represents a rare hostile bid from a Chinese company and is also China's biggest push into Australian iron ore after Citic Pacific's $10 billion Sino Iron project, which has been bogged down by cost overruns and delays and is widely considered a failure.
Boasteel and Aurizon went straight to Aquila shareholders with the offer, without the blessing of Aquila's executive chairman Tony Poli, who has a 29% stake in Aquila. Baosteel is the second-largest shareholder in Aquila with a 19.8% stake.
Aquila’s shares have risen 42% from the pre-offer price since the bid was announced on May 5. They closed Thursday at A$3.52, above the A$3.40 offer price, amid speculation that the bidders might yet sweeten the bid further.
Bao Of Steel?
However, Baosteel has shown no indication it will do so. Aquila's independent board sub-committee is due to make a formal recommendation on the offer, which is conditional upon Baosteel and Aquila receiving 50% acceptances.
The bidders drew one step nearer with a nod from Australia's regulators on Thursday. In an ASX filing, the bidders said they have received letters from Australia's Foreign Investment Review Board, "advising that there is no objection to the acquisition of Aquila."
Aquila is developing two major Australian projects -- it has 50% stakes in the West Pilbara iron ore project and the Eagle Downs hard coking coal project, a coal mine in the Bowen Basin in Central Queensland.
The greenfield projects require substantial capital expenditure requirements and, as mining companies globally undergo restructuring, few aside from the deep-pocketed Chinese are seen to have the funds needed to develop such projects. A Moody's report on May 7 said it expects Aquila's capital expenditure needs to total A$8 billion over the next three to four years.
Baosteel said in early May that the cash offer will be fully funded from the bidders' cash reserves and debt facilities. Baosteel also said that upon completion of the deal it would own up to 85% of Aquila, with Aurizon owning the rest.
Since Baosteel already has a near-20% stake, that would mean it acquiring a further stake worth about A$910 million.
Despite the recent revision in its bridge loan request, financing is not seen as a problem for the state-backed company.
"The acquisition cost is low when compared with Baosteel's sizeable cash and liquid financial investments," Jiming Zou, an analyst at Moody's, wrote in the credit rating firm's report. He added, nonetheless, that the transaction would expose Baosteel to significant execution risks.
Deutsche Bank is advising Baosteel on its bid. Goldman Sachs is advising Aquila. UBS and Satori are advising Aurizon.
China's offshore acquisition spree has continued to fuel lending activity. Cofco, which earlier this year said it is buying 51% of grain trader Nidera and Noble Agri, has already tapped lenders, as has Fosun, which was in the market with a €500 million bridge loan to acquire the insurance arm of Portugal’s Caixa Geral de Depósitos
However, onshore lending to Chinese miners has been more selective now compared with five years ago. "Five years ago we saw Chinese mining companies coming out and throwing money around," said one resources banker. "We don’t see that [now]. It’s hard to get that kind of leverage in China today."