Bloomberg News

Arrium Rejects A$1.01 Billion Takeover Bid From Noble, Posco

October 02, 2012

Arrium Ltd. (ARI) rebuffed a A$1.01 billion ($1.05 billion) offer from Noble Group Ltd. (NOBL) and 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 as a slump in commodity prices eroded 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 going to see more M&A activities in the resources sector because conditions are conducive,” said Tim Schroeders, who helps manage $1 billion in equities at Pengana Capital Ltd. in Melbourne. “We’re at a new stage where the strong companies grow stronger and the weak ones perish.”

Largest Asset

The attempted acquisition would be the largest of an iron and steel asset in Australia since Marubeni Corp. (8002) agreed to 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, and South Korea’s STX Corp. in investing in the mine, which is controlled by closely held Rinehart’s 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 announcing $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.

Declining Prices

The bid from Noble and the South Korean companies came after Arrium, also Australia’s second-biggest steelmaker, plunged 22 percent this year through Sept. 28. 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, which fell to a near three-year low of $86.70 last month, traded at $104.20 a ton yesterday, according to The Steel Index Ltd.

“Posco needs a supplier of the raw material,” said Bang Minjin, an analyst at HI Investment & Securities Co. in Seoul, who has a buy recommendation on Posco. (005490) “As a bunch of good targets are put up for sale in Australia. Posco may continue to tap targets if Arrium rejects its bid.”

Spokespeople at Posco, Korea Investment, Korea Finance and National Pension Service, declined to comment.

“The proposal was stated to be conditional, incomplete and non-binding,” Arrium said yesterday in a statement. “The board believes that the proposal undervalues Arrium in the context of a change of control transaction.”

Arrium rose for a second day, up 5.2 percent at 71.5 cents at the close in Sydney, trading below the offer price of 75 cents. The stock jumped a record 25 percent yesterday.

Double Output

The company plans to almost double iron ore output to 11 million metric tons after June 2013 from its mines in South Australia, Arrium said in February. It’s also expanding capacity at its port in the state to 12 million tons a year, it said in its annual report last week.

Iron ore accounted for more than half Arrium’s 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.

“The difficulty is by rejecting an opportunistic bid it doesn’t alleviate pressure on the board to improve its earnings and the balance sheet,” Pengana’s Schroeders said. The proposal “will have a long way to play out,” he said.

UBS AG is Arrium’s financial adviser and Allens Linklaters is its legal adviser, Arrium said.

Name Change

The company changed its name to Arrium from OneSteel in July as it shifts focus to iron ore production from steel- making. The company’s steel manufacturing, distribution and recycling units are located mainly in Whyalla, South Australia. OneSteel was spun off from BHP Billiton Ltd. (BHP) in 2000.

“Arrium’s board must carefully consider the possibility of extracting a superior offer from the consortium in exchange for due diligence rights,” Credit Suisse Group AG analysts Michael Slifirski and Sam Webb wrote in a report yesterday. “This needs to be balanced against the risk of iron ore prices that force the company to sell assets below future realizable values or raise equity at a deeply discounted share price to reduced debt and interest to meet covenant tests.”

The offer from Steelmakers Australia 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 yesterday. The company said on Sept. 28 its net debt, including hedging, stood at A$2.2 billion as of June 30.

“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 yesterday in a statement.

Global Takeovers

Arrium’s biggest shareholder is Government of Singapore Investment Corp. with a 6.06 percent stake, according to data compiled by Bloomberg. It also has a 5.15 percent stake in BlueScope Steel Ltd. (BSL), Australia’s largest steelmaker.

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.

To contact the reporter on this story: Soraya Permatasari in Melbourne at soraya@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net


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