Sinosteel sets precedent

Following Chinese steel company Sinosteel's announcement that it had secured majority control in iron ore miner Midwest Corporation last week, questions have been raised regarding the potential of future acquisitions of WA mining companies.

Sinosteel's $1.36 billion takeover is historic as it marks the first successful hostile takeover by a state-owned Chinese group for an Australian miner.

Shortly after Sinosteel gained majority control over Midwest, it moved to appoint three new directors to the board, although at this stage it seems unlikely that Sinosteel will achieve the 90 percent acceptance level required to force compulsory acquisition of the remaining shares.

Midwest is an attractive acquisition for the Chinese steel maker in an environment of rising iron ore prices in an industry dominated by Rio Tinto and BHP Billiton.

Advisory company Morgan Stanley received $19.3 million worth of shares from Midwest as payment for advisory services relating to the takeover offer.

A key turning point for Sinosteel, which was also advised by law firm Deacons, was a Takeovers Panel ruling of "unacceptable circumstances" surrounding rival miner Murchison Metals bid for Midwest.

The panel found that Murchison's largest shareholder, US hedge fund Harbinger Capital Partners, was an associated entity as it also held a stake in Midwest and could therefore not use its voting rights while the Sinosteel offer was active.

Murchison Metals terminated its planned merger with Midwest after failing to gain the support of majority shareholder Sinosteel.

"Sinosteel has made it clear that its primary objective at this time is to gain outright control of Midwest and we could not agree terms that made sense for our shareholders," Murchison executive chairman Paul Kopejtka said in a statement.

In an ASX announcement, Murchison stated that had the proposed Murchison/Midwest merger been successful, the combined entity would have been the second largest pure play iron ore producer in Australia and would rank amongst the ASX top 25 companies

The value of the potential merger did not escape the attention of Sinosteel, which has applied to the Foreign Investment Review Board for approval to increase its holding in Murchison.

"The inescapable fact remains that a merger of Murchison and Midwest would deliver great value. These are highly complimentary projects with similar ore types, located in the same geographic region and reliant on the same port and rail infrastructure," Mr Kopejtka said.

A government ruling on Sinosteel's application to potentially acquire Murchison has not yet been delivered, with mounting government concerns over the possibility of iron ore customers controlling the pricing and production of producing firms.

"We welcome foreign investment. We welcome it from everywhere, including from China, but we will apply decisions on a case-by-case basis in the national interest," Treasurer Wayne Swan said recently.


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