The offer price represents a 35% premium to the last traded price of Midwest on March 13 and an 80% premium to the volume-weighted average price for the one-month period prior to the bid for Midwest by Murchison Metals. Export-Import Bank of China will be providing the debt to fund SinosteelÆs offer.
Significantly, SinosteelÆs offer is not subject to customary due diligence. In an Australian Securities Exchange (ASX) filing, Midwest wrote that Sinosteel has not undertaken due diligence, despite access to a data room being offered, because the Chinese firm would not agree standard commercial requirements regarding non-disclosure and standstill provisions with respect to increasing its stake in Midwest. But specialists comment that extending negotiations over confidentiality and other agreements can be used as a tactic by the sell-side to prolong discussions and try to extract a better offer out of the buy-side.
Sinosteel also disclosed in its filing with the ASX on Friday that it currently owns 19.89% of Midwest, making it the largest shareholder of the Australian company. The offer is subject to a minimum acceptance level of 50.1%, which means Sinosteel only needs another 30% of MidwestÆs outstanding shares to be successful.
MidwestÆs principal assets are an iron ore project already in production and hematite and magnetite development projects, both in Western Australia.
Sinosteel is a state-owned enterprise in China which is primarily a commodities trader. It has been working with Midwest on developing its new mines. The agreement between the Chinese and Australian firms gives Sinosteel an option to acquire an ownership interest in the development projects. In addition to its relationship with Midwest, Sinosteel also has two other joint ventures in Australia. Analysts reckon Sinosteel is seeking to vertically integrate to secure a source of supply of iron ore.
ôWe have made this offer directly to Midwest shareholders as we firmly believe it provides the opportunity to realise certain value in cash in an environment that remains highly challenging for the development of large-scale resource projects,ö says Tianwen Huang, Sinosteel president in a written statement. Sinosteel is advised by JPMorgan and Deacons.
Midwest has been in play since October 2007 when Murchison Metals, backed by Mitsubishi of Japan, made an unsolicited takeover offer to Midwest shareholders. The all-scrip proposal offered one Murchison share for every 1.08 Midwest shares, valuing Midwest at under $1 billion. Midwest directors, advised by Morgan Stanley, recommended shareholders reject the Murchison offer as it under-valued the company.
It seems from the sequence of events that Sinosteel was brought in by Midwest as a ôwhite knightö to stave off the Murchison bid. This scenario also suited Sinosteel as the Chinese companyÆs options on MidwestÆs developments could have been jeopardised if a Murchison-Midwest combine was successful.
Sinosteel tabled an offer of A$5.60 per share to acquire control of Midwest in December. This had the desired result with respect to Murchison, as the original bidder said in February that its offer would lapse.
What is not as clear is why Sinosteel has felt compelled to go hostile for Midwest. On January 25, Midwest informed the ASX that Sinosteel had acquired a 10% ownership interest in Midwest but had ôno current intentions of making an unsolicited takeover offer for Midwestö.
On February 20, Midwest advised shareholders not to tender their shares to Sinosteel as its offer also undervalued the company. It seems that Sinosteel is charting a course of action based on the assumption that Midwest shareholders may not share the Midwest board's assessment on its offer.
Midwest shares gained 30% in ASX trading on Friday to close at A$5.43. They are still 17 cents shy of SinosteelÆs offer.
On February 27, Midwest informed the ASX that in its May annual general meeting it will be asking shareholders to approve a share option incentive plan for executive directors, senior management and non-executive directors. Under the plan, non-executive directors Jesse Taylor (who is also the chairman), David Law, Roger Tan and Stephen de Belle will be entitled to 13 million options exerciseable at A$5.60, but which will vest only when MidwestÆs share price goes over A$7. Analysts have commented that the A$7 could well be the indicative price at which management will be willing to recommend a bid to shareholders.
Australian media has also been speculating about the role in all this of David Law, the Malaysian businessman who reportedly owns 13% of Midwest. In an ASX filing on March 13, Midwest refuted an Australian Financial Review article which speculated that various Malaysian shareholders could be acting in concert with Law as their substantial shareholding notices were sent from the same fax machine in a lawyerÆs office.
SinosteelÆs decision to take its offer directly to shareholders rather than continue to negotiate with Midwest management should clarify some of these outstanding issues.
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