Sinosteel's hostile bid in Australia turns friendly

Sinosteel's improved offer of $1.27 billion gains the support of Midwest's board but specialists says China will still have to be cautious when acquiring Australian companies.
ChinaÆs Sinosteel has improved its offer for Australian iron ore company Midwest to A$1.36 billion ($1.27 billion) and succeeded in winning over Midwest's directors. But specialists are guarded in their views on whether this will have any big-picture implications for Chinese M&A.

On April 29 Chinese state-owned enterprise Sinosteel hiked its offer to Midwest shareholders to A$6.38 per share. The new price won the approval of the Midwest board of directors and turned the first hostile bid by a Chinese company in Australia into a friendly one. Sinosteel is being advised by JPMorgan.

The new price is a 14% increase over SinosteelÆs earlier offer of A$5.60 per share and a 54% premium to Midwest's closing price on March 13, the day before Sinosteel tabled its original offer. The offer, which closes on June 5, is still subject to the condition that Sinosteel achieves a shareholding of 50.1% in Midwest.

The price is a premium of about 4% to the high of A$6.15 that the shares reached on April 28. The price moved up from A$5.82 on April 24, even before the revised offer was announced.

Sinosteel had already built a 19.9% stake in Midwest before it put forward its March 13 proposal to shareholders and thus needs to corner another 30.2% for the takeover to succeed. Midwest's shares closed at A$6.27 last Friday (May 2) so Sinosteel seems to have a reasonable chance of succeeding with its bid.

SinosteelÆs proposal has already been approved by AustraliaÆs Foreign Investment Review Board.

ôThe revised offer of A$6.38 per share in cash is an attractive offer for Midwest shareholders providing the opportunity for certainty and transparent value in the current volatile share market," said Midwest chairman Jesse Taylor as he recommended the offer on April 29. ôIn addition to Midwest shareholders, this revised offer also benefits other Midwest stakeholders.ö

SinosteelÆs improved offer came immediately after the Midwest board mailed advice to shareholders suggesting they reject the A$5.60 per share offer. One of the reasons cited by the board was that it was certain that Sinosteel would table an improved offer based on the A$200 million it spent to acquire the 19.9% stake and the unlimited term-loan facility it has secured from the Export-Import Bank of China. And from the outcome, it seems that the board gauged the situation correctly. Midwest is being advised by Morgan Stanley.

As earlier reported by FinanceAsia, Midwest's deputy chairman, Malaysia-based David Law, who holds a direct 13% stake in Midwest but is speculated to influence up to 40% of the voting rights, was a critical decision-maker. LawÆs support of the enhanced price seems to have been key to the new proposal gaining the approval of the board.

Sinsoteel sweetened its offer further by agreeing to vote in favour of the issuance of up to 15 million options with an exercise price of A$1.46 to executive directors and senior directors, as well as one million options with an exercise price of A$5.16 to employees.

Meanwhile, the Australian Securities Exchange (ASX) had its own queries on MidwestÆs share price movements the week the revised offer was tabled and sought clarifications that ASX guidelines had been complied with.

In an ASX filing on April 30, Midwest stated that representatives of Sinosteel and Midwest, including David Law, met on April 27 in Malaysia and continued discussions the following day on a plane journey between Kuala Lumpur and Perth. Midwest said that no agreement was reached on April 27 and the price of A$6.38 was agreed on Monday during the plane journey, but by the time the flight landed the ASX was closed for trading. Midwest said the issuance of share options was also discussed during the flight.

Through ChinalcoÆs $14 billion acquisition of a 12% stake in Rio Tinto ûthe largest ever outbound deal from China û and SinosteelÆs bid for Midwest, China has demonstrated that it is a savvy operator which will do what it takes to secure the natural resources necessary for the country to continue to grow.

But specialists are guarded in suggesting that SinosteelÆs victory has bigger-picture implications for Chinese investment in Australian companies. Critical factors for any M&A deal to succeed, and especially a hostile one, are a strong management team capable of and empowered for quick decision-making. Sinosteel is one of a few Chinese state-owned enterprises that could have pulled off this deal, say sources.

It is also necessary that Chinese acquirers are able to be transparent with respect to their ownership structure and funding sources, and that they can demonstrate that decisions are being commercially and not politically motivated for such bids to gain momentum, add specialists.

If the spree of deals China has embarked upon in 2008 is an indication, it seems the country is listening.
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