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Mark O'Neill

Hebei steelmaker's parent buys shares to counter bidder

China's 11th-largest steel producer, Handan Iron & Steel, is fighting a hostile takeover by the country's No 1 producer, Baoshan Iron & Steel, in a Chinese version of the Mittal-Arcelor battle.

Since February, Baosteel and its subsidiaries  had been buying shares in Handan Steel.

Handan Steel said Baosteel and two affiliates had spent 481 million yuan on 138.2 million Handan shares or 5 per cent of its issued capital with the potential to increase that stake to 10 per cent if warrants were exercised.

On June 2,  Handan Steel announced a counter-offensive, saying that its parent firm, Handan Iron & Steel Group, would spend at least 1.5 billion yuan to buy up to 700 million Handan Steel shares  'to protect small and medium-sized investors and offset demand for warrants'.

The takeover battle marks a new departure for China where the reform of state shares to make them tradable has unleashed western-style takeover battles. Previously, a lack of liquidity would have made a takeover bid impossible.

Handan Steel launched its state-share sale plan in February, offering call warrants to holders of its tradable shares. If all the one-year warrants are exercised, the parent company's stake  would fall to 25.56 per cent from   59.06 per cent.

However,  while  in the case of Arcelor it is shareholders who will have the final word on whether  to accept Mittal's  offer, it is Beijing that will decide the destiny of Handan Steel and approve any takeover of the firm, regardless of how many shares Baosteel has bought.

Steel is a highly political industry and Baosteel must convince officials in Beijing, especially those in the State Development and Reform Commission, that a takeover fits their long-term plans for the restructuring of the industry.

Officials at Baosteel's investor relations department were unavailable for comment yesterday.

The takeover talk has energised the stock market, driving up  Handan Steel shares by more than 50 per cent since the beginning of  last month.

With the encouragement of Beijing, which wants to see six  domestic groups  dominating the market, the restructuring of the steel industry has been accelerating since  last year, involving both foreign and  local players.

Both Arcelor and Mittal have acquired large minority stakes in Chinese steelmakers.  Handan group president Liu Rujun  in April said it was talking to Arcelor and ThyssenKrupp  about a possible sale of a stake in his group.

Baosteel has been an aggressive player in this restructuring. In the past six months, it has set up strategic partnerships with three leading  producers - Magang Group, the parent firm of Maanshan Iron & Steel; Ba Yi Iron & Steel of Xinjiang; and Taiyuan Iron & Steel.

It is applying to build a plant with a capacity of 10 million tonnes in Zhanjiang, Guangdong province,  and invest about US$200 million in a joint-venture mill in Brazil with iron ore producer Companhia Vale do Rio Doce.

'China's industry lacks concentrated production facilities and is hampered by inefficient industrial structures, a lack of technical innovation and too many low-production firms,' said Xie Qihua, Baosteel's chairman until May 17. 'It is better that we concentrate production than foreigners buy our companies.'

What makes Handan Steel attractive is that it is the most important mill in Hebei province which last year produced  73.86 million tonnes, up 25.3 per cent over 2004 and  for the fifth consecutive year  was the biggest steel-producing province in China.

In April,  Handan Steel said it would invest 19.4 billion yuan in the largest single steel  venture in Hebei to make 4.6 million tonnes of high-end steel - most of it flat products - for the car sector.

Without sufficient funds for such a big project, it needs investment from outside,  domestic or foreign.

The latest issue of Caijing  magazine reported that Baosteel  held talks  with the government before it started buying Handan Steel  shares and that the Hebei authorities  were divided on the merits of a takeover.

Those in favour argued Baosteel would bring capital, management and China's most advanced technology to a  firm set up in 1958 and made mainly low-end products.

Those against said a takeover would end the provincial government's plan to set up a powerful local industry by merging most of its more than 24 mills into two key  conglomerates.

The Hebei government has merged older mills in the north of the province into Tangshan Iron & Steel, but smaller plants in the south are resisting a merger with Handan Steel.

Opponents say a takeover would also lead to redundancies among the managers of  Handan Steel and a substantial loss of tax revenue to the Hebei government if the ownership moved to Baosteel, which is based in Shanghai.

Early this month, the Hebei branch of the State-owned Assets Supervision and Administration Commission, the largest shareholder in the Handan Steel  group, said Baosteel would not displace it as the controlling shareholder.

'Hebei Sasac and Baosteel have no intention to co-operate on a capital level,' an official said.



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Handan resists takeover by Baosteel