Valin's investment in Fortescue is approved, paving the way for the Chinalco-Rio Tinto deal, with more proposals on the way
The Australian government yesterday approved the acquisition of a 17.4% stake in Fortescue Metals Group by Chinese steel maker Hunan Valin Iron and Steel Group Company. Meanwhile, Oz Minerals announced that China Minmetals will shortly table a revised proposal to acquire most of its assets.
While announcing the approval for Valin under the Foreign Acquisitions and Takeovers Act (FATA), Australian treasurer Wayne Swan also outlined the conditions that the approval is subject to and which Valin and Fortescue are both bound by.
Valin is permitted to own a maximum of 17.55% of Fortescue. The Valin nominee on the board of Fortescue will have to declare upfront any "potential conflict of interest relating to Fortescue's marketing, sales, customer profiles, price setting and cost structures for pricing and shipping".
The conditions are intended to ensure the "appropriate separation of Fortescue's commercial operations and customer interests, and support the market-based development of Australia's resources", the treasurer's statement goes on to say.
Valin is currently acquiring 17.4% in the form of 260 million new shares at a purchase price of A$644.8 million ($447 million), combined with a sell-down by hedge fund Harbinger Capital. Valin's total outlay will be more than A$1.3 billion. Deutsche Bank advised Valin, while Fortescue was advised by J.P. Morgan and Grant Samuel.
In the original agreement, inked in February, Valin was to acquire 225 million new Fortescue shares for A$558 million, translating to a per share price of A$2.48 each, and 275 million Fortescue shares from Harbinger at the same price, at a total outlay of A$1.2 billion. On March 9 Fortescue said Valin would buy another 35 million new shares at A$2.48, to meet the Australian company's further need for cash.
Some analysts suggest that the conditions are indicative of what may be required for approvals to be given for the $19.5 billion investment by Aluminum Corporation of China (Chinalco) in Australian diversified metals and mining company Rio Tinto through direct equity and joint ventures. The Chinalco deal received competition approvals last week but has yet to be approved by the critical Foreign Investment Review Board (FIRB).
Credit Suisse and Morgan Stanley are advising Rio Tinto. The former Lehman Brothers team (now at Nomura), Blackstone, China International Capital Corporation and J.P. Morgan are advising Chinalco.
The deal has sparked concerns among Rio Tinto investors, analysts covering the stock and politicians that Chinalco, which is also one of Rio Tinto's customers, will get undue influence over pricing. The Rio Tinto approval is currently in the second stage of the Australian scrutiny process, which is not surprising given the complexity of the deal and its far-reaching implications.
As for Fortescue, the approval for the Valin investment comes only days after another bid by a Chinese company for an Australian natural resources firm was rejected. China Minmetals Corporation's $1.7 billion offer for Oz Minerals, the world's second largest producer of zinc and a substantial producer of copper, lead, gold and silver, was turned down on March 27 under FATA because Oz Minerals' Prominent Hill mine is near an Australian weapons testing range.
However, Oz Minerals requested yesterday that its shares be suspended pending an announcement about a revised takeover proposal by Minmetals. Oz Minerals said in an Australian Securities Exchange filing that the new proposal envisages Minmetals acquiring all of Oz Minerals' assets except Prominent Hill and that it will also provide a solution to Oz Minerals' refinancing issues. In February, Minmetals said that it would try to sell the Golden Grove polymetallic mine in Western Australia, but yesterday's announcement led analysts to conclude that Golden Grove could be replacing Prominent Hill in the deal.
Minmetals, a Chinese state-owned enterprise, is being advised by UBS. Oz Minerals is being advised by Caliburn Partnership and Goldman Sachs JBWere.
The decision of three Australian firms to turn to Chinese saviours in the same month (all three deals were announced within days of each other in February) is no mere coincidence. Rio Tinto is highly geared following the acquisition of Canadian aluminium producer Alcan in 2007 and will use part of the monies invested by Chinalco to prepay an $8.9 billion tranche of its Alcan credit facilities due in October 2009 and a $10 billion tranche due in October 2010.
Oz Minerals has $1.3 billion of debt, originally due to be refinanced by yesterday, for which the firm has sought an extension from lenders. Indeed, Oz Minerals was suspended from trading from early December until mid-February as it was engaged in efforts to restructure its debt.
Fortescue also needs further capital to achieve its expansion aims.
All three Australian firms have been exploring options to raise capital, but in the current environment, liquidity is scarce and many potential buyers are grappling with their own balance sheet issues. The ability of Chinese firms to make offers that are not subject to financing contingencies makes them preferred partners.
But within Australia questions are being raised about the long-term implications of having Chinese SOEs buy strategic stakes in sensitive areas such as natural resources. The decision by China to turn down a proposed $2.4 billion takeover bid by The Coca Cola Company for leading Chinese juice firm Huiyuan Juice in mid-March has provided further ammunition to critics of the Chinese investments into Australia. A lobby in Australia is questioning why Chinese companies should be allowed to have strategic and financial ownership of local firms when Chinese regulators block takeovers in non-strategic sectors such as beverages.
The Australian government seems to have realised though that it needs to maintain its commitment to open and free markets and, further, that non-commercial solutions to the balance sheet issues being faced by its mining companies are not a viable solution.