Sinosteel's bold play for Midwest is paying off

Sinosteel increases its ownership in the Australian iron ore company to 33.8%, as a fall in the local share market makes a competing takeover bid from Murchison less attractive.
ChinaÆs Sinosteel informed the Australian Securities Exchange (ASX) yesterday that it now owns 33.8% of Australian iron ore firm Midwest, up from 28.4% in its previous filing.

SinosteelÆs tactic to trump MurchisonÆs competing all-share reverse merger proposal of one Murchison share for 0.575 Midwest shares is proving a success. Murchison is an Australia-listed company with interests in iron ore mines and infrastructure.

On May 28 Sinosteel decided not to increase its A$6.38 ($6.13) per share bid for Midwest any further, calling its offer full and final and suggesting the cash it was offering shareholders provided certainty in volatile markets. And it would seem that shareholders are listening.

The state-owned Chinese steel maker took a further gamble by making its offer completely unconditional on May 30. Sinosteel is now bound to take all shares of Midwest which shareholders tender, even if it does not reach a 50.1% majority. And Sinosteel is reaping the benefits of this strategy as its shareholding in Midwest is slowly but surely creeping up. On June 3 Sinosteel announced its shareholding had increased from 19.89% to 28.37%. And yesterday its shareholding increased further to 33.82%.

Sinosteel is being advised by JPMorgan and Deacons.

Competing bidder Murchison filed its own ASX notice yesterday, noting the increase in the stake held by its rival, but suggesting this "results primarily from acceptance by a single Midwest shareholder". It reiterated its confidence that its proposal to merge with Midwest would proceed. Murchison is being advised by Gresham Advisory Partners and Porter Novelli.

But sources close to the deal suggest that it is not one shareholder but a number of shareholders who have, over the past week, decided to accept Sinosteel's cash offer and this leads to the question about how many more will follow.

In addition to declaring its bid unconditional, Sinosteel had raised questions about the legality of the strategy adopted by Murchison and US hedge fund Harbinger Capital. Harbinger owns 19.9% of Murchison, making it the company's largest shareholder. Harbinger has thrown its weight behind Murchison's bid for Midwest and after Murchison's reverse merger proposal was announced, it started accumulating shares in Midwest. Harbinger now owns around 9% of the target. Murchison owns 9.9%.

Sinosteel is alleging that the purchase of Midwest shares by Harbinger breaches Australia's Foreign Acquisitions and Takeovers Act (FATA). Sinosteel's case is that both Harbinger and Murchison are foreign companies and thus collectively cannot own more than 15% of an Australian company unless they have sought and received prior approval of Australia's Foreign Investment Review Board. Sinosteel is also arguing that Murchison and Harbinger are acting in concert with respect to their shareholding in Midwest.

Midwest is being advised by Morgan Stanley.

While the regulator has not yet announced its ruling, Sinosteel seems to have succeeded in creating uncertainty with respect to the Murchison bid.

Sinosteel is also benefiting from negative sentiment prevailing on the Australian stock exchange following drops in oil and metal prices. Shares generally traded weak yesterday and Midwest closed down 4.3% at A$6.44. The shares are now trading just eight cents higher than Sinosteel's offer, which is a lot lower than the A$7.04 they were trading at as recently as May 29.

Murchison closed 7% lower at A$3.80 yesterday. Shareholders are now imputing a value around A$6.61 per share to Murchison's all-share offer, down from the value of A$7.17 when Murchison announced its merger proposal.
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