Regulator forces ArcelorMittal's hand

The Hong Kong Exchange rules that ArcelorMittal must pay $621 million to minority shareholders of China Oriental, even though approvals for the deal are still not in place.
ArcelorMittal will pay $621 million to the 27% minority shareholders of China Oriental to comply with the Hong Kong regulatorÆs ruling that it acted in concert with China OrientalÆs majority shareholder when it acquired a 28% stake in the Chinese steel company in November. This is based on a per share price of HK$6.12 ($0.79).

The total amount ArcelorMittal will fork out depends on how much it finally pays China OrientalÆs controlling shareholder, Han Jingyuan, for his controlling 45% stake. This price will be based on pre-determined calls and puts using a formula which takes into account Ebitda and net cash or debt position in addition to volume weighted average traded price. The complexity of the formula makes the final price difficult to predict. On a simplistic assumption that ArcelorMittal will pay Han HK$6.12 per share then Han will receive HK$8.08 billion ($1.04 billion). On this basis, including the payment to the 27% minority shareholders, ArcelorMittal will pay HK$12.9 billion for the 72% outstanding shares.

The HK$6.12 price per share which ArcelorMittal will pay minority shareholders is based on the price ArcelorMittal, the worldÆs largest steel company, paid Diana Chen Ningning (Chen) for 28.02% of China Oriental amounting to HK$5.02 billion ($643 million). The price represents a 13% premium to China Oriental's closing share price of HK$5.4 each before it was suspended from trading on November 7.

The mandatory general offer (MGO) has been forced on ArcelorMittal as the Hong Kong Takeovers and Mergers Panel has ruled that the company acted in concert with Han when it bought ChenÆs 28% share.

The background to the current ruling lies in one of the first hostile takeovers attempted in Hong Kong, in June this year. Chen, who owned 28% of China Oriental, launched a hostile offer for the company, saying Han, who owns 45% and is chairman and CEO, had not been able to create shareholder value. At this stage, ArcelorMittal approached Han with an offer to act as a ôwhite knightö, i.e. help to defeat the hostile.

ArcelorMittal is represented by ING and Baker & McKenzie.

Chen went on to launch a tender offer which needed to corner 22% of the outstanding shares to take her holding above 50% and be successful. Chen could only get support from 17% of China OrientalÆs shareholders so had to abandon the hostile bid on October 2.

Meanwhile, ArcelorMittalÆs discussions with Han continued, encompassing a variety of options including launching ôa competing offer, the pricing mechanism for call and put options, cost sharing and financingö. Han is represented by UBS and Freshfields.

The day after ChenÆs offer was declared unsuccessful, ArcelorMittal and Han inked a co-operation agreement whereby ArcelorMittal would commence negotiations with Chen to buy all her shares. Han stipulated to ArcelorMittal that buying ChenÆs shares was a pre-cursor to any agreement between Han and ArcelorMittal.

ArcelorMittal acquired ChenÆs shares on November 7 leading to a trading suspension on November 8.

On November 9, ArcelorMittal and Han signed a shareholders agreement, subject to ArcelorMittal receiving all necessary PRC approvals including anti-trust. The approvals are thus critical to the agreement taking effect.

Once all approvals are in place, Han and ArcelorMittal have agreed a series of options over a four-year period which allow ArcelorMittal to call HanÆs shares in tranches and allow Han to put his shares, subject to conditions and a pre-agreed pricing formula incorporating, among other things, the Ebitda achieved by China Oriental in the relevant prior period. Han has also negotiated the right to remain chairman for a three-year period, after ArcelorMittal gains control of 50% of China Oriental.

The regulatorÆs stand is that ArcelorMittal and Han were persons acting in concert. So even though ArcelorMittalÆs current stake is below the 30% threshold for launching an MGO, the company's deal with Han means that minority shareholders will now be given an option to exit.

The Hong Kong stock market regulator also clarified in its statement that it was ônot a disciplinary matterö, but in a rap on the knuckles for the involved parties, said that the Takeovers Panel was ôconcerned with the almost total absence of consultation by the parties (Han and China Oriental) and their advisers prior to entering into both the acquisition and the put optionö.

ArcelorMittal issued a statement on Friday saying that via the agreement with China Oriental it will ôstrengthen its position in China's fast growing steel marketö. The steel giant intends to ôshare technology, technical expertise and know-howö with the Chinese company as well as assist in sourcing inputs.

"We have made no secret of our wish to participate more actively in China's fast growing steel market, and the agreements we have signed are a major step forward in delivering that strategy,ö says Lakshmi Mittal, president and CEO of ArcelorMittal in a written statement.

In his own comments with respect to the deal, Han took pains to clarify that ArcelorMittal is becoming China OrientalÆs second-largest shareholder.

ArcelorMittal also confirmed its intention to maintain a listing of China Oriental after the MGO. Prima facie this seems like a circuitous route as ArcelorMittal is likely to have to sell-down shares it acquires in the MGO to achieve the 25% minimum float requirements of the Hong Kong Stock Exchange. But it is also likely that ArcelorMittal and Han realise that maintaining a listing may be one way of ensuring that the regulators are pre-disposed to approving the deal.

Analysts have commented that regulatory approvals are the wild card for this deal. The Chinese government is sensitive to foreign ownership in sectors deemed as strategic and steel is one such industry. But China Oriental is incorporated in Bermuda and its ôprincipal activity is holding investments in iron and steel manufacturing companies in the PRCö. Thus, there seems to be a basis for regulators to allow the current deal to go through.

For ArcelorMittal, the deal is critical as it provides a route for the steel company to gain a foothold in China, which is a key future market.

This case could well be the next test of how open China is to free market practices.
¬ Haymarket Media Limited. All rights reserved.
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