China’s voracious appetite for raw materials to feed its development has been driving up the prices of global commodities. Now the country’s acquisitiveness may have the same effect on the prices of commodity producers.
State-owned Sinosteel Corp. demonstrated China’s increasingly aggressive approach to acquisitions by launching a hostile bid for Australian iron ore producer Midwest Corp. earlier this year, then tenaciously persisting in its quest in the face of a last-minute counteroffer by local rival Murchison Metals. If Sinosteel prevails with its A$1.4 billion ($1.3 billion) gambit, it would mark the first time a Chinese company has succeeded with an unsolicited takeover offer abroad.
Midwest had been in play since October 2007, when Murchison offered A$4.70 a share for the company. Sinosteel, which has had a joint venture with Midwest at two mines since October 2005, countered in January by bidding A$5.60 a share in cash and snapping up a 19.9 percent stake. Midwest rejected that overture, but in April the board endorsed a revised offer of A$6.38 a share, a premium of 81.8 percent above the level before Murchison’s bid.
Murchison countered late last month by proposing a new share-swap offer valuing Midwest at A$7.17 a share. At the same time, Harbinger Capital Partners, a New York–based hedge fund allied with Murchison, bought an 8.1 percent stake in Midwest. Sinosteel appeared to gain the upper hand with a quick and robust reply. It appealed to Australia’s Takeover Panel to strip Harbinger of its shares, alleging that the fund violated the country’s law on foreign takeovers by not getting prior authorization. The Chinese company also bought blocks of Midwest shares on the market, lifting its stake to 33.8 percent. Even if Sinosteel fails with its bid, which was due to close this month, the Chinese company would emerge with a large stake in a Midwest-Murchison combination and could launch a fresh takeover attempt, analysts say.
China’s record in hostile takeover situations has been dismal to date. In 2005, China National Offshore Oil Co. withdrew its $18.5 billion bid for Unocal Oil Co. in the face of U.S. political opposition. But Sinosteel has shown surprising agility in pursuing Midwest, bankers involved in the deal say. Company president Huang Tianwen gave considerable autonomy to his point man on the deal, Wu Hongbin. Wu, a vice general manager, supervised negotiations with West Perth–based Midwest and with David Law Tien Seng, a Malaysian Chinese businessman who owns 14 percent of Midwest and works with Malaysian associates who also hold stakes in the company. Reports suggested that some of those investors sold to Sinosteel after Murchison’s revised offer.
“Hostile takeovers are difficult, including this one,” says Alan Young, the JPMorgan Australia banker who advised Sinosteel on the Midwest deal. But, he adds, “Sinosteel put together a management team that was able to react quickly and nimbly on corporate, legal and public relations issues.”
The surge in commodity prices is prompting Chinese companies to scramble for raw materials. In February, Aluminum Corp. of China (Chinalco) teamed up with the U.S.’s Alcoa to buy 9 percent of the U.K.’s Rio Tinto for $14.3 billion in an apparent attempt to block a takeover bid for Rio by Australian rival BHP Billiton. Chinalco executives have said a combined company would control too much of the world’s mineral supplies. Rumors of Chinese stake building drove up BHP’s share price last month.
In this climate more Chinese companies are likely to consider hostile takeovers overseas, bankers and analysts say.
“The internationalization of Chinese companies is an unstoppable trend,” says Victor Gao, an independent Beijing-based M&A adviser. “They will be more active in mergers and acquisitions, buyouts and strategic alliances. They will adapt all means to play the game, including hostile takeovers.”
Such efforts could provoke a political backlash. Although Australia’s Foreign Investment Review Board approved the Midwest sale, unconfirmed reports claim the government has put several other potential Chinese deals on hold while it reviews its takeover policy. As a consequence, Chinese sources say, the country’s private entrepreneurs could enter the game.
