Global Economics

Sinosteel Says No to Takeover Offer


The Chinese steelmaker refuses to enter a bidding war for Australian mining company, Midwest, and stands firm with its $1.3 billion offer

Sinosteel yesterday said it will not increase its A$1.36 billion ($1.3 billion) offer for Australian mining and exploration company Midwest and questioned the legality of a competing takeover proposal put forward by Murchison on Monday this week.

Market observers had been waiting to see how Sinosteel would respond to Murchison's reverse merger proposal.

"Our offer price is now final and A$6.38 (per share) is the maximum we are willing to pay," says Sinosteel president Tianwen Huang in a written statement filed with the Australian Securities Exchange (ASX) yesterday. "In an uncertain environment, Midwest shareholders will be in no doubt of our position." Sinosteel is being advised by JPMorgan.

The reverse merger proposal agreed between Murchison and Midwest sees Murchison offer one of its shares for every 0.575 Midwest share, which implies a value of A$7.17 per Midwest share based on Murchison's five-day weighted average price of A$4.12 up to May 23, the last trading day before Murchison announced its offer. Murchison is being advised by Gresham Partners.

In its filing with the ASX, Sinosteel has raised a number of concerns relating to the Murchison proposal, namely:

— that Midwest directors have recommended Murchison's proposal but have not agreed to its proposed terms or in any way committed Midwest to the transaction;

— the delay of at least three months before Murchison shareholders will vote on and ratify the tabled proposal;

— the fact that Midwest directors have not committed to vote in favour of the Murchison proposal with respect to their own shares.

The most significant point raised by Sinosteel is already being debated in the Australian media, namely the question of whether the proposal has been structured to avoid complying with relevant takeover laws in Australia. Sinosteel said the proposal "constitutes oppression of minority shareholders" and that it will "vigorously assert its rights on these issues". And sources close to the deal confirm that Sinosteel is convinced it has a strong legal case in its favour.

Sinosteel's first and third points are also interesting as it seems Midwest directors are trying to hedge bets with respect to their own advice. The Midwest board is recommending the Murchison reverse merger but has not withdrawn its recommendation for the cash offer from Sinosteel.

It seems that Sinosteel is also seeking to quell any speculation that it might itself be interested in buying Murchison. Sinosteel referred to claims pending against Murchison and the "high proportion of low grade beneficiation ore" at its mines, which makes the economics of its projects uncertain, as supplementary reasons why both Murchison's value and its bid for Midwest were uncertain.

Midwest responded to Sinosteel's ASX filing yesterday by: reminding shareholders that Sinosteel's A$6.38 per share offer is conditional upon the Chinese company reaching 50.1% ownership; reminding them of the options available to them currently; and finally commenting on how shareholders had pushed up Midwest's share price on news of the Murchison merger.

Analysts say that a Midwest-Murchison combine would be able to exploit several synergies as the companies have neighbouring projects under development such as the Jack Hills and Weld Range projects. "These are highly complementary projects with similar ore types, located in the same geographic region and reliant on the same rail and port infrastructure," wrote Murchison in its ASX filing on May 26.

Sinosteel's offer for Midwest is A$5.60 per share, which it will enhance to A$6.38 if it corners 50.1% of the issued shares. At the higher price, Sinosteel is valuing Midwest at A$1.36 billion. Its offer is due to expire on June 13.

One of the reasons why Murchison has structured its bid the way it has is because Sinosteel has accumulated a 19.89% interest in Midwest, making it the company's single largest shareholder. Sinosteel could use its shareholding to block an ordinary takeover proposal. The reverse merger only requires 50.1% of Midwest shareholders to vote in favour. Under Murchison's proposal, Midwest would remain a listed entity with 52.2% of the company owned by Murchison shareholders and the rest held by existing shareholders. Sinosteel's holding would be diluted to around 9.7% post-merger.

Sinosteel's announcement yesterday regarding Midwest is the latest move in respect of an asset that has been in play for almost nine months.

In October 2007 Murchison Metals, backed by Mitsubishi of Japan, made an unsolicited takeover offer to Midwest shareholders. The all-scrip proposal offered one Murchison share for every 1.08 Midwest shares, valuing Midwest at under $1 billion. Midwest directors, advised by Morgan Stanley, recommended shareholders reject the Murchison offer as it under-valued the company.

Sinosteel, which was already working with Midwest on a joint development, in December tabled an offer of a flat A$5.60 per share to acquire control of Midwest. This forced Murchison's hand, although only briefly it now emerges, as in February Murchison allowed its original offer to lapse. But Midwest still did not recommend the Sinosteel offer to shareholders. Then in March, Sinosteel took its A$5.60 per share offer directly to Midwest shareholders. This was the first ever hostile bid by a Chinese company in Australia, as it did not have the support of the Midwest board. Earlier this month Sinosteel improved its offer by agreeing to pay A$6.38 per share if it gained control of the company and won the backing of Midwest's board.

It now appears that Murchison has been working in the background to develop a proposal that would checkmate Sinosteel. The outcome of the Murchison offer may be questionable but nonetheless, excited Midwest shareholders pushed its share price up further yesterday to A$7.04.

Anand is a writer at FinanceAsia.com.

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