Arrium Ltd. (ARI) rebuffed a A$1.01 billion ($1.05 billion) offer from Noble Group Ltd. (NOBL) and some South Korean investors, the biggest bid for an Australian iron ore asset since the government declared the mining boom over.
Arrium, the Sydney-based producer previously known as OneSteel Ltd., rejected the offer from the group that also included Posco Australia Pty, National Pension Service of Korea, Korea Investment Corp. and Korea Finance Corp., saying it was too low and conditional. The bidders, grouped under Steelmakers Australia, remain interested in developing the proposal to secure a deal, they said separately.
Steelmakers Australia joins companies including China’s Meijin Energy Group Co. in bidding for Australian resources companies after a slump in commodity prices eroded asset valuations. Iron ore fell 25 percent this year on concern about slowing demand from China, prompting Resources Minister Martin Ferguson in August to declare an end to the nation’s mining boom.
“We’re at a new stage where the strong companies grow stronger and the weak ones perish,” said Tim Schroeders, who helps manage $1 billion in equities at Pengana Capital Ltd. in Melbourne. “We’re going to see more M&A activities in the resources sector because conditions are conducive. Commodity prices will achieve a new lower trading range that will make it very difficult for people to get projects off the ground.”
At A$1.01 billion, the attempted acquisition would be the largest of an iron and steel asset in Australia since Marubeni Corp. (8002) said it would pay A$1.5 billion for a share of billionaire Gina Rinehart’s Roy Hill project in March, data compiled by Bloomberg show. Marubeni joined Posco (005490), and South Korea’s STX Corp. in investing in the mine, which is controlled by closely held Hancock Prospecting Pty.
Acquirers have announced $6.23 billion of Australian iron and steel asset purchases in the past year, with more than 99 percent of the spending by overseas buyers, the data show. In the past five years, about $11 billion of deals have been announced, with buyers led by Japanese companies that have announced $2.4 billion worth of deals, the data show.
Meijin’s A$435 million bid for Adelaide-based Western Desert Resources Ltd. (WDR) is subject to government and regulatory approvals in Australia and China, the companies said Sept. 18.
The bid from Noble and the South Korean companies came after Arrium plunged 22 percent this year. Australia & New Zealand Banking Group Ltd. (ANZ) yesterday lowered its iron ore estimate for the fourth quarter to $110 a metric ton from $135 a ton, citing oversupply in China. Iron ore traded at $104.20 a ton Sept. 28, according to The Steel Index Ltd.
“The difficulty is by rejecting an opportunistic bid it doesn’t alleviate pressure on the board to improve its earnings and the balance sheet,” Schroeders said. The proposal “will have a long way to play out.” Any changes to the offer will depend on iron ore and steel prices, he added.
Arrium climbed a record 25 percent to close at 68 cents in Sydney yesterday. The key stock index was little changed.
“The proposal was stated to be conditional, incomplete and non-binding,” Arrium said in yesterday’s statement. “The board believes that the proposal undervalues Arrium in the context of a change of control transaction.”
Arrium plans to almost double iron ore output to 11 million metric tons after June 2013 from its mines in South Australia, the company said in February. Iron ore accounted for more than half its earnings before interest, tax, depreciation and amortization in the year ended June 30, according to data compiled by Bloomberg. Full-year net income fell to A$58 million from A$230 million a year earlier, the data shows.
UBS AG is Arrium’s financial adviser and Allens Linklaters is its legal adviser, Arrium said.
The company changed its name to Arrium from OneSteel in July as it shifts focus to iron ore production from steel-making. Arrium still owns steel manufacturing, distribution and recycling units mainly in Whyalla, South Australia. OneSteel was spun off from BHP Billiton Ltd. (BHP) in 2000.
Buying Arrium would give Noble, Asia’s largest publicly- traded commodity supplier, Posco and other bidders businesses including iron ore mines and steel manufacturing and distribution in South Australia.
“The consortium partners believe they have the capacity to advance the development of Arrium’s businesses over the long term by securing iron ore exports from South Australia and ensuring a future as an Australian steel producer that is globally competitive,” William Randall, director at Steelmakers Australia, said in the statement.
Twenty-seven global takeovers of iron and steel companies announced in the past five years, valued the targets at 9.8 times earnings before interest, depreciation, taxes and amortization, data compiled by Bloomberg show.
At 75 cents a share, Arrium would have an enterprise value of A$3.2 billion, or 5.5 times its earnings before interest, tax, depreciation and amortization of A$581 million in the year through June, the data shows.
The offer was conditional on the bidders arranging debt financing, completing a study of the target’s books and regulatory approvals in Australia and Korea, Arrium said. The company said on Sept. 28 its net debt, including hedging, stood at A$2.2 billion as at June 30.
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