The deep pockets of Chinese acquirers relative to other companies around the world were evident again in two deals announced on Friday. China's largest steel manufacturer, Baosteel Group Corporation, will acquire up to 15% of Perth-based Aquila Resources for $240 million, while state-owned China Investment Corporation will participate in a $1.4 billion bail-out of Canary Wharf developer Songbird.
Baosteel and Aquila inked a memorandum of strategic co-operation and a share subscription agreement allowing Baosteel to buy 43.9 million new shares for A$285.6 million ($240 million), or a price of A$6.50 per share. With its investment, state-owned Baosteel has negotiated one directorship on the Aquila board and has nominated Dai Zhihao, a vice-president of Baosteel who joined the Chinese firm in 1983, to take up the seat.
Shanghai-based Baosteel has also negotiated anti-dilution rights whereby it will be entitled to participate in any issuance of new shares by Aquila to maintain its shareholding. Baosteel has agreed not to increase its shareholding in Aquila above 19.99% or to sell the shares it is currently being allotted until August 2010. As a result of the investment, Baosteel will become the second-largest shareholder in Aquila.
Baosteel's investment will enable Aquila to make progress on some of the existing projects in its portfolio for which it is capital-constrained. Baosteel is advised by Deutsche Bank.
This is Baosteel's first major international strategic investment in a listed company. It is in line with China's strategy to secure long-term supply of iron ore, coking coal and manganese for its core businesses.
As part of the agreement between the two companies, Baosteel also intends to make direct investments in some of Aquila's projects and help the Australian company to raise financing to commercialise those projects. Baosteel will work with Aquila to raise "low-cost financing from Chinese institutions for a number of the company's projects, including the strategic West Pilbara iron ore project", said Aquila in its Australian Securities Exchange filing on Friday.
Aquila added that Baosteel's support will be of significant importance, value and advantage to it and termed the strategic co-operation "a potential underwriting of its key development projects".
Baosteel and Aquila have agreed a process whereby Baosteel will be allowed to conduct initial due diligence and exclusive negotiations on Aquila projects, should the company decide to introduce a third party into any of them.
Aquila and Baosteel also plan to establish a joint sales arrangement to assist Aquila in distributing its production in China. The two firms will ink long-term raw material off-take arrangements from these projects once they are in production.
Baosteel's investment in Aquila is subject to approvals by Australia's Foreign Investment Review Board (FIRB) and Chinese regulators. It is also subject to a MAC, or no material adverse change clause, in Aquila as well as approval by Aquila's shareholders. The deal comes a fortnight after Chinese coal miner Yanzhou Coal tabled a $3 billion bid for 100% of Australian Felix Resources and suggests that Chinese appetite for natural resources assets in Australia is undiminished. The Yanzhou-Felix deal is also awaiting FIRB approval.
Also on Friday, China's sovereign wealth fund, CIC, joined a consortium of investors to bail out Songbird Estates, the developer and operator of London's Canary Wharf office block.
Songbird is raising equity from CIC, the Qatari SWF, Qatar Holding as well as its existing investors, Morgan Stanley Real Estate Funds and GF Investments. Songbird will use the money to repay £880 million ($1.4 billion) of loan facilities outstanding to Citi, which are due on October 20. Songbird will repay the loans at a 5% discount to the principal and interest accrued, suggesting it needs to raise £836 million.
Songbird said one-third of the funds raised or £275 million will be preference shares and the balance will be equity. CIC and Qatar Holding, who are both buying into Songbird for the first time, will buy the entire preference share issue and will also underwrite the equity issue.
When filing its annual report for the latest fiscal year, Songbird warned investors about a material risk it "would breach the existing Citi loan covenants should a refinancing not occur". Songbird also said it is trying to deleverage itself and "create a more stable financial structure". Canary Wharf has been hard hit by the downturn in the financial sector as the majority of the tenants in the area are financial institutions.
This deal "is a strong vote of confidence in Canary Wharf and its future prospects by two substantial, long-term, institutional investors and by existing investors", Songbird's chairman, David Pritchard, said in a written statement.
Last month CIC paid $1.5 billion to acquire a 17% stake in Canadian miner, Teck Resources.
Songbird is taking advice on the refinancing from J.P. Morgan Cazenove, Rothschild and Morgan Stanley.
