Rio Tinto Group

Sinosteel makes A$954m hostile offer for Midwest

PUBLISHED : Saturday, 15 March, 2008, 12:00am
UPDATED : Saturday, 15 March, 2008, 12:00am

Takeover bid faces hurdles as Australian miner's stock surges

Sinosteel Corp, the mainland's second-largest iron ore trader, has made a hostile A$954 million (HK$7 billion) all-cash offer for Australia's Midwest Corp, reflecting China's increasing hunger for the steel-making raw material.

But the bid is unlikely to see smooth sailing as the scramble by mainland companies for overseas resources faces increasingly tough regulatory and financial hurdles.

The Beijing-based company, which already owns a 19.9 per cent stake in the Perth-based iron ore prospector, yesterday offered A$5.60 for each Midwest share, a 3.13 per cent premium to its closing price of A$5.43.

If the deal is successful, it will mark the first hostile takeover by a mainland firm. Sinosteel first proposed the A$5.60 a share offer, which values the company at A$1.2 billion, in December last year.

'They don't have any chance of winning at A$5.60,' said one Midwest shareholder. 'They will have to bump it up.'

Sinosteel's bid will not be successful unless it can secure more than 50.1 per cent of Midwest's shares.

The offer represents a 34.94 per cent premium to Midwest's Thursday close, but the shares surged A$1.28 or 30.84 per cent yesterday.

China, the world's largest steel producer, imports more than 50 per cent of its iron ore as rising steel-making capacity stretches supply lines to the limit.

Midwest advised shareholders to take no action on the offer and reiterated comments made last month that a A$5.60 a share bid undervalued the company.

Sinosteel said it had approval from Australia's Foreign Investment Review Board for the bid and believed the offer provided Midwest shareholders with 'an opportunity to realise certain value in cash for their shares'.

While Sinosteel maintains its offer is attractive, the surge in Midwest's shares yesterday puts pressure on the mainland firm to sweeten the bid.

'The fact that Sinosteel was able to take an almost 20 per cent stake in the company shows that shareholders are happy with the price of A$5.60 a share,' said a source close to Sinosteel. 'At this stage, they don't see any need to raise the bid.'

The deal will not be open to shareholders for at least two weeks while documentation work is being completed. 'They're trying to see if the shareholders disagree with the board and they may sweeten it if they don't get enough acceptances,' a market observer said.

The hostile bid for Midwest is the latest in a series of offerings by Chinese firms eager to obtain overseas metal and energy reserves. Earlier this year, Aluminum Corp of China (Chinalco) paid US$14.05 billion for a 9 per cent stake in Rio Tinto, the world's second-largest miner.

On February 20, Mount Gibson Iron asked Australia's regulators to block a deal by the Hong Kong-listed arm of mainland steelmaker Shougang Corp, which planned to buy a stake in the company. The Australian miner said the motive for the deal was questionable.

'Anyone who has iron ore overseas can strike it rich on the domestic market because the price gap is huge,' said Liu Baoyao, a steel analyst at GF Securities.

Some mainland steel mills are paying double last year's price for the raw material.