26/05/2008 - 11:33

Murchison, Midwest agree to merge

26/05/2008 - 11:33

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Iron ore developers Murchison Metals Ltd and Midwest Corporation Ltd are likely to merge after Midwest's directors unanimously endorsed a proposed scheme of arrangement that values their stock at $7.17 per share.

Iron ore developers Murchison Metals Ltd and Midwest Corporation Ltd are likely to merge after Midwest's directors unanimously endorsed a proposed scheme of arrangement that values their stock at $7.17 per share.

The merger proposal from Murchison trumps Chinese company Sinosteel's conditional cash offer of $6.38 per share for Midwest and appears to have ended the acrimonious battle between the two Perth-based companies.

The merger proposal involves a Murchison scheme of arrangement, with the consideration offered being 0.575 shares in Midwest for each Murchison share.

In practical terms, the scheme will effect a 'reverse takeover' of Midwest by Murchison, with the merger ratio implying a value of $7.17 per Midwest share, based on the Murchison $4.12 five day weighted average share price to the close of trading on 23 May 2008, the last trading day before the date of this announcement.

Reversing the traditional takeover structure will facilitate a 100% merger of the two companies in the face of Sinosteel's 19.9% interest in Midwest, and stated intention to block any alternative proposals to its unsolicited takeover offer, Murchison said in a statement.

Instead of paying a premium to Midwest shareholders under a competing takeover offer, Murchison will recommend to its shareholders that they accept Midwest shares under the scheme of arrangement at the implied value of $7.17 per Midwest share.

While this reverse merger also requires Midwest shareholder approval, this is an ordinary resolution requiring a majority of 50.1% of votes cast.

Midwest will be the remaining ASX listed entity owned 52.2% by Murchison shareholders and 47.8% by Midwest shareholders.

The latest offer increases Midwest's stake in the combined entity from the previous Murchison merger proposal, launched in October last year, which was 32%.

Speaking to journalists in a teleconference today, Murchison corporate advisor Michael Ashford of Gresham Advisory Partners Ltd said Sinosteel's initial takeover offer for Midwest earlier this year was the trigger for Murchison's latest move.

"We were able to re-engage with the Midwest board about two months ago to see if there was a transaction that we could structure that would be fair to both sides," Mr Ashford said.

"It's fair to saw we made good progress at that time but we couldn't reach a final agreement on a range of issues."

Following Sinosteel's higher cash offer for Midwest of $6.38, Mr Ashford said Murchison realised the clock was ticking to produce an alternative offer and hence lodged the latest offer on Saturday.

"It's been a hard road to get to this point but no one is disputing the logic of bringing together these two companies to create something special," Murchison chairman Paul Kopejtka said.

Both companies have neighbouring iron projects in the Midwest region with each holding a Weld Range and Jack Hills iron ore project. Midwest chairman Bryan Oliver said synergies from the merger will be evident from day one.

He said the development of each companies' smaller iron projects, Midwest's Jack Hills and Murchison' Weld Range, provided greater opportunity for development in the wake of a merger and therefore brings value to shareholders at an earlier date.

Specific figures for cost savings and synergies have yet to be finalised.

Additionally, both companies stressed that the merger did not affect the tender process for the development of the $2 billion Oakajee port, where proposals are currently being considered by the state goverment. A final decision is not expected until June 30.

Murchison nominated Oakajee Port and Rail as its preferred infrastrcuture provider while Midwest has nominated Yilgarn Infrastucture.

The Merger is structured to allow the shareholders of both companies to share in the significant uplift in the value of their shares that is expected to flow from building a group with scale and international significance at a time of unprecedented customer demand and global corporate interest.

The Midwest board unanimously recommends the merger proposal based on an initial assessment and an expectation that it will re-rate the Midwest share price.

The Midwest board is maintaining its recommendation of the Sinosteel $6.38 a share offer while it fully assesses the implications of the merger proposal and, in particular, the market reaction.

Both companies have since come out of a trading halt with Murchison's share price climbing 12.9% to $4.56 while Midwest's share price has gained 12.5% to $7.03 in late afternoon trading today.

Should the merger go ahead, both companies will hold four boardroom positions each with Mr Kopejtka taking the helm as chairman and Murchison managing director Trevor Matthews residing in the same role.

Murchison is being advised by Gresham Advisory Partners Limited and Franklyn Legal.

A Midwest Corp statement is pasted below:

Highlights
- Merger Proposal to create a leading Australian iron ore player in the mid west region of Western Australia
- Merger to be implemented via a Murchison scheme of arrangement, with Midwest remaining the listed ASX entity
- Merger terms of 0.575 Midwest shares for each Murchison share and option on issue
- Implied value of $7.17 per Midwest share based on the 5 day VWAP of Murchison, representing a 14.9% premium to Midwest's 5 day VWAP, and a 12.4% premium to Sinosteel's Proposed Increased Offer of $6.38 cash per Midwest share (conditional on Sinosteel receiving acceptances of at least 50.1%)
- The Midwest Board unanimously recommends the Merger Proposal based on an initial assessment and an expectation that it will re-rate the Midwest share price

- The Merger Proposal provides Midwest shareholders with the opportunity to:
- accept Sinosteel's current offer;
- potentially sell their Midwest shares on market at a premium to Sinosteel's Proposed Increased cash Offer of $6.38; or
- retain their Midwest shares and support the potential merger with Murchison.

Midwest Corporation Limited (ASX: MIS) ("Midwest") today announces it has received a merger proposal from Murchison Metals Limited ("Murchison") ("Merger Proposal"), to combine the two companies to create a leading Australian iron ore company.

The merger is to be implemented by way of a Murchison scheme of arrangement, with Midwest remaining the listed ASX entity.

The Merger Proposal will give Midwest Shareholders the opportunity to:

- accept Sinosteel's current Offer;
- potentially sell their Midwest shares on market at a premium to Sinosteel's Proposed Increased cash Offer of $6.38; or
- retain their Midwest shares and support the potential merger with Murchison so that they can participate in the potential value creation and re-rating of the merged entity.

Shareholders who retain their Midwest shares will also be able to accept a superior proposal if one emerges.

Murchison has also confirmed that it does not require any break fee arrangements to be agreed as part of its Merger Proposal.

The Midwest Board will maintain its recommendation of the $6.38 Sinosteel takeover offer while it fully assesses the implications of the Murchison Merger Proposal and in particular the market reaction.

Strategic Rationale

The Midwest Board unanimously considers that the proposed merger of Midwest and Murchison is compelling, and has the potential to unlock substantial additional value for shareholders of both companies:

- Midwest and Murchison have highly complementary assets, and the merged entity would hold a portfolio of strategic assets at various stages of development across the mid west region;

- the merged entity would be the dominant iron ore player in the mid west region, and possess a superior resource position and production profile;

- a merger of the two companies would provide an opportunity to realise significant revenue, cost and development synergies, through optimised project development, scale benefits, and operational efficiencies;

- the merger would help de-risk and accelerate project development, through risk diversification and an improved funding position, thereby providing a better platform to pursue growth opportunities; and

- combining Midwest and Murchison would create a major iron ore company with an enhanced market position and liquidity. The merged entity would be well-positioned to pursue an acquisition strategy and drive regional consolidation, whilst remaining an attractive corporate play.

Terms of the Merger Proposal
Merger consideration
The consideration under the Merger Proposal is 0.575 Midwest shares for each Murchison share and option on issue. This is the equivalent of approximately 1.74 Murchison shares per Midwest share, which represents an implied value of:

- $7.17 per Midwest share, based on the 5 day VWAP of Murchison; and
- $7.03 per Midwest share, based on the closing price of Murchison on 23 May 2008.
This would result in the merged entity being owned 52% by Murchison shareholders and 48% by Midwest shareholders.

The Merger Proposal represents an attractive premium for Midwest shareholders:
- a 14.9% premium to Midwest's 5 day VWAP;
- a 12.4% premium to Midwest's closing price on 23 May 2008;
- a 12.4% premium to Sinosteel's Proposed Increased cash Offer of $6.38,6 which is conditional on Sinosteel receiving acceptances of at least 50.1%; and
- a 28.0% premium to Sinosteel's cash Offer of $5.60, Sinosteel's Offer price if it fails to receive acceptances of 50.1% of Midwest shares under its Offer.

Conditions
The Merger Proposal is conditional, among other things, on:
- the unanimous recommendation of the Midwest Board;
- Midwest shareholders approving the implementation of the merger;
- Murchison shareholders approving the implementation of the merger; and
- Midwest shareholders approving the issue of Midwest management and employee options as previously announced.

-Murchison and Midwest negotiating and agreeing the terms and conditions of a Merger Implementation Agreement.

Annexed to Murchison's announcement of today is a summary of the key terms which Murchison has proposed to Midwest. The Midwest Board has reserved the right to negotiate all of these terms when negotiating and
agreeing the Merger Implementation Agreement.

Midwest Chairman, Mr. Jesse Taylor, said the Merger Proposal represented an attractive offer for Midwest shareholders.

"The $7.17 implied value of the Merger Proposal to Midwest shareholders represents a premium to Sinosteel's Proposed Increased Offer of $6.38 and Midwest's last closing price".

"The Merger Proposal creates greater flexibility and optionality for Midwest shareholders. They can either accept Sinosteel's cash Offer, sell their shares on market at a potentially significant premium, or retain their shares and support the merger".

Midwest CEO, Mr. Bryan Oliver, said "A merger between Midwest and Murchison would create a leading iron ore company in the mid west region. The strategic logic of the merger is a compelling opportunity for Midwest and Murchison shareholders".

"The outlook for the iron ore sector remains very positive and the merger provides shareholders of both companies with the opportunity to share in the benefits of a combination and potential re-rating, whilst retaining exposure to any value upside as the merged group fully develops what will be a stand-out portfolio of assets".

Next Steps

Midwest and Murchison are now working together to finalise a transaction timetable. Further details will be provided to shareholders in due course.

Advisers
Midwest has engaged Morgan Stanley as financial adviser, and Hardy Bowen and Minter Ellison as legal advisers.

 

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