Midwest shares soar on takeover play by Murchison

10/10/2007 - 08:12

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Shares in iron ore explorer Midwest Corporation Ltd have soared by more than 30 per cent after rival Murchison Metals Ltd made a takeover bid worth up to $986.3 million.

Midwest shares soar on takeover play by Murchison

Shares in iron ore explorer Midwest Corporation Ltd have soared by almost 30 per cent after rival Murchison Metals Ltd made a scrip-based takeover bid worth up to $986.3 million.

The board of Midwest met today to discuss the offer and is expected to issue a formal recommendation later today.

In the meantime, the Perth-based target has advised shareholders to take no action.

Shares in Midwest were up 27.6 per cent or 97cents at $4.48 by market close. Murchison shares closed 10 cents higher at $5.18 each.

Midwest advised shareholders to take no action until its board had had an opportunity to consider the offer and make a recommendation to shareholders.

Japan-backed Murchison has devised a two-tiered offer for China-backed Midwest, which values its fellow iron ore miner at up to $986.33 million.

The base offer of one Murchison share for every 1.16 Midwest shares values the company at $919.18 million or each Midwest share at $4.38, representing a premium of 25 per cent on yesterday's closing price.

But Murchison proposes to offer more if Midwest does not incur a material tax liability from the potential sale of its 50 per cent stake in its Weld Range and Koolanooka projects in Western Australia to SinoSteel Corporation, China's largest steel products dealer.

The higher, conditional offer is one Murchison share for every 1.08 Midwest shares, valuing the stock at $4.70 each and representing a premium of 34 per cent.

Murchison managing director Trevor Matthews said the two companies had held merger discussions for 18 months but could not agree on a price.

In the end, Mr Matthews said, Murchison had decided to get an offer before Midwest's shareholders.

He said there were significant benefits in the merger, primarily in developing their combined Jack Hills and Weld Range deposits as two mines, rather than four.

Mr Matthews said a combined group could have the potential for 70-80 milllion tonnes of annual production, a scale that would assist in the feasibility and financing of the required infrastructure.

In addition, he said that having one proponent for the port and rail needed instead of two contestants should reduce the time required to get the infrastructure in place.

Analysts say the takeover makes sense, given both companies are competing to develop new port and rail infrastructure in WA's mid-west to carry their iron ore exports from mine to market.

This week the WA government announced a tender process for the right to develop the port infrastructure, limited to Murchison and Midwest.

The government has been frustrated by a lack of cooperation between the two companies.

Both can compete to develop the rail but the Babcock & Brown Ltd-controlled WestNet Rail, which has existing rail in the region, will have the opportunity to play a part.

By acquiring Midwest, Murchison will eliminate a rival for the infrastructure development, which is likely to cost at least $3 billion.

The combination of the two is also complementary as the companies have neighbouring projects.

Both have separate iron ore projects at Weld Range and while Murchison is exploring its 50 per cent held asset at Jack Hills, Midwest is exploring in the same area.

Murchison said today it believed that the combination of the two was a unique opportunity to unlock cost and revenue synergies and accelerate the development of the emerging mid-west iron ore region.

"Midwest shareholders will benefit from an immediate uplift in the value of their investment in Midwest and will also share in the value that Murchison believes will be created if Midwest and Murchison jointly develop the Jack Hills and Weld Range projects," it said.

"These are highly complementary projects with similar ore types, located in the same geographic region and relying on the same rail and port infrastructure."

MF Global institutional equities dealer Sam Willis said it was a good deal that was a long time coming.

"It's something they had to do given what's at stake (with the infrastructure proposals) ... and by tying up, it essentially means the contract will go to the combined entity and they don't have to compete each other for that infrastructure," he said.

Midwest is aligned with soon-to-be-listed Yilgarn Infrastructure Ltd, which has five heavyweight Chinese backers, including the firm behind what is arguably the largest port in the world, China Harbour Engineering Company Group.

Murchison is in joint venture with Japanese trading giant Mitsubishi Corporation.

Mr Willis said if Murchison was successful, it might push out Midwest's Chinese backers.

"We might see a price war come into play - this has the potential to turn into a bidding war," he said.

China and Japan's appetite for iron ore meant other players would possibly become involved who would be prepared to pay a considerable premium for high quality iron ore from the mid-west region, he said.

A Yilgarn spokeswoman said the company had no comment.

Murchison says it expects to lodge its bidder's statement by the end of this week.


 

The full text of a Murchison announcement is pasted below

Highlights:

- Unconditional offer
- Substantial premium via two tier offer structure
- Compelling financial and strategic logic
- Combined Stage 1 projects with planned production of 4mtpa in 2008
- Combined Stage 2 projects with targeted iron ore production of 45mtpa
- Potential for superior value creation through synergies and optimised project development

Perth, Western Australia, 10 October 2007 - Murchison Metals Limited ("Murchison") announces its intention to make an unconditional takeover offer to acquire all of the shares in Midwest Corporation Limited ("Midwest").

Murchison believes that the combination of Murchison and Midwest represents a unique opportunity to unlock cost and revenue synergies, accelerate the development of the emerging mid-west iron ore province and provide greater certainty for the development of new mid-west port and rail infrastructure.

Murchison believes the proposed offer is compelling. Midwest shareholders will benefit from an immediate uplift in the value of their investment in Midwest and will also share in the value that Murchison believes will be created if Midwest and Murchison jointly develop the Jack Hill's and Weld Range projects. These are highly complementary
projects with similar ore types, located in the same geographic region and relying on the same rail and port infrastructure.

Under a 'two-tiered' offer structure, Murchison is offering a higher price for Midwest shares if Murchison is reasonably satisfied, prior to the end of the offer period, that Midwest will not incur a material tax liability if Midwest sells a 50% interest in the Weld Range and Koolanooka projects to Sinosteel Corporation.

The Base Price offered by Murchison is 1 new Murchison share for every 1.16 Midwest shares held (the "Base Price").

The Base Price values your Midwest shares at $4.38 each and represents a premium of 25% based on the closing price of Midwest shares and Murchison shares on 9 October 2007.

The Higher Price is 1 new Murchison shares for every 1.08 Midwest shares held (the "Higher Price").

The Higher Price values your Midwest shares at $4.70 each and represents a premium of 34% based on the closing price of Midwest shares and Murchison shares on 9 October 2007.

The Higher Price will be paid if Midwest provides information so that Murchison is reasonably satisfied that Midwest will not incur a material tax liability if Midwest sells a 50% interest in certain of Midwest's projects to Sinosteel Corporation.

Further details of the Murchison offer, the rationale for the bid and the circumstances in which the Higher Price will be paid are set out in the Briefing Paper accompanying this announcement.

Murchison Executive Chairman Paul Kopejtka said today:

"We have held a number of discussions with Midwest directors who represent Midwest's major shareholder seeking to agree terms for a merger."

"Whilst it was apparent from those discussions that the benefits of combining Midwest and Murchison were well recognised, we could not agree merger terms. We therefore decided to make this offer so that the full Midwest board and all Midwest shareholders can consider what we believe to be the compelling merits of combining the two
companies."

Mr Paul Kopejtka said recent events had also made the timing of the bid sensible.

"The value that can be generated by combining these companies will diminish over time as each company moves forward with separate development plans."

"Murchison recently completed its landmark transaction with Mitsubishi. In addition, on Monday the WA State Government has confirmed the process to select a party to develop rail and port infrastructure in the mid-west region of Western Australia."

"We believe that the time is right to give the Midwest board and all Midwest shareholders an opportunity to unlock value that neither company can deliver on its own."

Offer Timetable
Murchison currently anticipates that it will lodge a bidder's statement in connection with this offer by the end of next week. The bidder's statement will set out all of the terms of Prince's offer.

The offer will be made by MMX Investments Pty Ltd, a wholly owned subsidiary of Murchison. The offer is expected to be dispatched to Midwest shareholders in late October and will be open for at least one month.

MMX Investments Pty Ltd has a relevant interest in 2.77% of Midwest's issued shares.

Murchison is being advised by Gresham Advisory Partners Limited, RBC Capital Markets and Franklyn Legal.

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