SYDNEY - Stunning increases in iron-ore prices have raised the stakes for
China's Sinosteel Corp and its rival in a billion-dollar battle to control
Australian miner Midwest Corp whose eventual outcome may be decided not by cash
but by Australia's competition regulators.
Sinosteel, China’s second-biggest metals trader, and Australian rival Murchison
Metals Ltd both see Midwest as the ideal vehicle for developing promising iron
ore deposits in Western Australia’s Geraldton region. These have soared in
value since Rio Tinto, the world's third-biggest mining company, last month
reached agreement with Chinese steelmakers on a 85% rise in ore shipment
prices.
Sinosteel has bid A$1.36 billion (US$1.3 billion) for Midwest, with which it
has joint ventures in two mining projects in Western Australia. Murchison,
backed by powerful US-based hedge fund
Harbinger Capital Partners, which ranks second in the New York Times' hedge
funds guide, has countered with the offer of a formal merger in an all-stock
deal worth A$2.8 billion.
The Chinese took their Midwest stake to 43.6% in mid-June, more than four times
larger than Murchison’s holding, and are believed to have acquired a further
3-4% this week after a slight drop in Midwest’s share price, which nevertheless
has surged to more than three times its price of last August.
Murchison now holds 9.98% of voting shares in Midwest. If it raises this to
10%, it will be able to prevent Sinosteel from launching a hostile takeover of
Midwest due to the way the voting shares are structured .
Midwest has recommended the Sinosteel offer to shareholders and Australia’s
Foreign Investment Review Board (FIRB) has given its blessing. After that, it
gets a little messy.
The Midwest board has simultaneously backed a merger with Murchison, creating
all sorts of anti-competition scenarios that have raised concern with
Australia’s securities watchdogs. Murchison had launched an unsuccessful scrip
bid for Midwest last year. Sinosteel has muddied the waters further by
submitting an application to acquire Murchison, in which it has a 2.4% stake.
The government referred this bid to the FIRB, which is expected to hand down
its ruling in late September.
Sinosteel has let it be known it isn't really interested in buying Murchison.
Rather, the Chinese steel company forced the regulatory intervention so it
could tighten the screws on the predatory Harbinger, claiming the US company
violated Australia’s foreign-ownership laws. Foreigners must obtain investment
approval to acquire more than 15% of an Australian company. Cases above this
shareholding are referred to the Takeovers Panel. Harbinger has a 19.98% stake
in Murchison.
Sinosteel's move has already drawn blood. The Takeovers Panel has instructed
that Harbinger cannot vote with its 4.27% interest in Midwest while the bid by
Sinosteel remains in play. Market regulators accepted Sinosteel’s complaint
that Harbinger had purchased the Midwest shares without giving notice under the
Foreign Acquisitions and Takeovers Act. Harbinger will have to dispose of the
Midwest shares by July 11 unless it obtains approval from the panel.
Sinosteel has given remaining Midwest shareholders until July 18 to accept its
unconditional offer and expects to wrap up the deal by the end of the month.
Murchison’s position has also been weakened by a decline in its share price,
which has undermined its all-stock bid for a reverse takeover. At the same
time, the value of Midwest shares have strengthened. Originally structured as a
10% premium to Sinosteel’s terms, Murchison's offer now is worth far less. The
shares dip has also enabled Sinoteel to re-enter the market: Australian
securities regulations preclude the suitor from buying Midwest shares at market
prices higher than its takeover bid without making a bigger offer.
Midwest can thank one of its key shareholders, David Law, for successfully
driving up Midwest's share price from the late-2007 level of about A$3.30 by
playing off the rival bidders. The price now matches Sinosteel’s offer of
$6.38.
Law, deputy chairman of Midwest, is the last standout from a group of Malaysian
shareholders who once formed a powerful voting block - the others accepted
Sinosteel’s offer weeks ago.
The success of Murchison’s reverse takeover of Midwest, which would leave the
suitor with 53% control, could be decided by how Law votes with his 13.4% stake
- assuming the regulators don’t get in first. Law is also believed to have
control over 40% of the board's voting rights.
Midwest needs 50.1% approval from its own shareholders to proceed with the
Murchison deal, which Sinosteel appears likely to reject. If Law sticks with
the company line and supports the merger, Murchison may just scramble through.
The likelihood is that Law, who has made a handy profit after buying his
Midwest shares for less than A$0.35, will sell before the Murchison deal goes
to a vote. There is speculation that he may have been waiting for the end of
the Australian financial year on June 30 to reduce his capital gains tax burden
before baling out.
Sinosteel will undoubtedly snap up some of his stock, but how far can it go
before the regulators step in again?
Chinese ownership of mining stocks has become a sensitive political issue in
Australia: in April, the Takeovers Panel stopped steelmaker Shougang Concord
from taking a 19.7% stake in another West Australian miner, Mount Gibson Iron,
that would have handed it effective control.
Another Australian iron ore miner, Fortescue Metals, has been courted by a
number of Chinese steelmakers, including Baosteel, Sinosteel and Chinalco,
since Harbinger revealed that it planned to offload its 16% shareholding in the
company. And Baosteel, Wugang and Angang are expected to launch a joint bid for
minority stock in BHP Billiton if the Anglo-Australian giant succeeds in its
US$173 billion takeover of rival Rio Tinto. Sinosteel's interests already
include a 40% stake in a mining joint venture with Rio.
In Beijing, regulators have elevated Australia’s status as an investment
destination for Chinese financial groups looking to offload some of the
country’s burgeoning foreign reserves. Chinalco, the country's largest maker of
aluminium, bought a 9% stake in Rio in February, prompting the Australian
authorities to introduce new guidelines for approving sovereign wealth funds as
a warning against strategic raids that might harm the national interest.
Australia's political leaders have given conflicting signals on whether they
intend to implement a sweeping 49% foreign ownership threshold specifically for
state-owned Chinese companies, which would put paid to Sinosteel’s bid.
Finance minister Wayne Swan, no doubt wary of upsetting his country’s biggest
trading partner, is waiting for the FIRB ruling on Murchison’s bid for Midwest
before acting. He will probably opt for a compromise solution whereby each
Chinese application is judged on its own merits.
Sitting on the sidelines, meanwhile, is another potentially key player, the
tough Harbinger boss Philip A Falcone, 45, who has fashioned a career from
pulling seemingly lost deals out of the fire.
Harbinger targets distressed and under-performing assets. Midwest may not fit
into the first category, but there is only one way its market standing will be
heading now that Rio has set a new global price benchmark or iron ore. So far
this year the two distressed funds managed by Falcone’s Harbinger Capital
Partners have risen by about 30%, against an average market gain for hedge
funds of under 1%.
Interestingly, his prime acquisition was another iron ore producer, Cleveland
Cliffs, whose share price has almost doubled since January. Aides say his only
focus in sizing up Midwest will be on medium-term price movements. Falcone's
ability in buying up companies that are undergoing structural changes such as
mergers and spinoffs also helps explain his interest in the reverse takeover
offer for Midwest by Murchison.
He also has deep pockets. Harbinger has US$25 billion in assets and is
reportedly targeting an additional US$4 billion by the end of the year to
bolster its war chest.
Some observers believe Harbinger will play dealmaker between Murchison and
Sinosteel so it can get on board with a merger and benefit from a three-way
linkup with Midwest that undoubtedly would be a dream partnership.
The two miners, Midwest and Murchison, are working on the same vein of deposits
to the north of Western Australia's coastal town of Geraldton, offering obvious
logistical advantages from a merger. Having a Chinese buyer waiting in the
wings couldn’t be a bad thing.
But Sinosteel, keeping a wary eye on those ore price movements, doesn’t see it
that way. As a state-owned enterprise, its mandate is to ensure an affordable
supply of resources for China’s thirsty steel mills.
If it loses out, many expect the steelmaker to cut its losses, bank the premium
from Midwest’s shares surge and look for another mid-range miner to target.
Then the Chinese whispers will start all over again.
Alan Boyd is a Sydney-based correspondent.
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