Bengang, parent in share deal
China steelmaker to pay for 10.3b yuan worth of assets through A-share issue
Bengang Steel Plates yesterday unveiled a massive A-share issue plan to fund its acquisition of 10.3 billion yuan worth of assets from its parent firm as the group gets into shape to negotiate a better merger deal with bigger rival Anshan Iron & Steel Group Corp.
Bengang, which has both foreign currency B shares and yuan-denominated A shares, would issue two billion new A shares to parent firm Benxi Iron and Steel Group, chairman Li Mohua said.
The announcement comes after a similar move by Anshan's A and H-share subsidiary Angang New Steel in issuing 12.74 billion yuan worth of A shares to its parent firm to help pay for 19.69 billion yuan of assets.
'Angang has completed its plan to list all assets and we are not going to fall behind,' Mr Li said. 'This will maximise our value for all our shareholders.'
The central government has ordered Anshan and Benxi to merge as part of an industry policy to improve competitiveness and halt overinvestment. It hopes the top 10 steel producers will control at least 50 per cent of the market by the end of the decade, rising to 70 per cent by 2020, compared with 35 per cent last year.
Mr Li said Beijing wanted the two groups to have a combined steel production capacity of 30 million tonnes by 2010 - 20 million tonnes from Anshan and 10 million tonnes from Benxi.
However, progress on the merger has been slow due to difficulties over employment and tax issues.
A joint company, Anben Iron & Steel Group, was set up last year to accommodate the merger but so far it has only resulted in co-operation over procurement, marketing, and research and development.
Another difficulty arises from the fact that although the two groups are based in Liaoning province, Anshan is administrated by the central government, while Benxi is owned by the provincial government. Merging the two would mean a loss of corporate tax revenues for Liaoning, and potentially result in increased unemployment through redundancies.
Bengang's A-share issue, being handled by Citic Securities, is seen as a move to better reflect the group's asset value and so increase its bargaining power with Angang.
'By beefing itself up, Bengang can potentially push for a better deal in the unpopular arranged marriage,' said BOCI Securities analyst Belle Chan.
Bengang's share issue price will be the higher of the average closing price of the 20 trading days before an April 11 shareholders' meeting to vote on the acquisition, and its net asset value at the end of last year. Based on its last traded price of 4.52 yuan, the shares would be worth about 9.04 billion yuan.
Listed in 1997, Bengang now only has steel billets hot-rolled plates production assets.
Acquisition of its parent firm's upstream iron smelting and downstream steel processing assets would allow it to have a complete industry chain from iron smelting to steel smelting and processing, reducing connected transactions from 29 billion yuan last year to five billion yuan, Mr Li said.
In October last year, Angang had to scrap a plan to raise billions of yuan from an A and H-share rights issue due to investor concerns about an oversupplied steel sector plagued by falling profits.