By Jason Simpkins
Murchison Metals, a company heavily backed by Japan-based Mitsubishi, has launched a hostile takeover of Midwest Corp., a company backed by Sinosteel, a state owned Chinese entity. The maneuver underscores a long-standing rivalry between the two nations, one that sees the two Far East juggernauts squaring off in a bid for a big slice of Australia's vast cache of natural resources.
At the heart of this particular conflict are operations at Weld Ridge and Jack Hills in Western Australia. Right now, the companies have neighboring operations at both locations. Murchison has said that jointly developing the two areas would "unlock cost and revenue synergies," that could total 40 million to 50 million tons a year.
With iron ore prices projected to rise as much as 20% to 30% in 2008 – the sixth-straight year of increases – there's an added incentive to get the deal done. Both Japan and China have been searching out alternative sources of the ore.
The deal is also important because $2.71 billion (A$3 billion) worth of infrastructure work is at stake. That would include a 186-mile (300km) rail link, and a port located north of the city of Perth.
But there's a problem: The two companies can't agree on how to best exploit the region's resources.
By accomplishing this takeover, Murchison would eliminate its only competition.
Murchison's hostile bid could be worth as much as $889.45 million (A$986 million) to Midwest. The bid has two options. The base offer is one Murchison share for every 1.16 Midwest shares. This deal values the company at $830.24 million, (A$919.8 million) or $4.04 (A$4.48) per Midwest share.
The second option includes a higher offer, which values the stock at $4.24 (A$4.70). But to qualify, Midwest must avoid any material tax liability from the sale of its 50% stake in the Weld Range and Koolanooka projects to Sinosteel. At the Australian equivalent of $4.24 a share (A$4.70 a share), Murchison is offering a 200% premium to the price at which Midwest executed a rights issue in May.
Murchison has made its all-paper offer unconditional, which means it does not need to secure the majority of its rival's shares.
The preliminary signs are positive. Shares of Midwest jumped nearly 30% Wednesday, when Murchison first launched its takeover bid. The Age, an Australian news source, quoted Murchison Chairman Paul Kopejtka as saying the British Virgin Islands-incorporated Amardale Offshore, which has a 15.2% stake in Midwest, had already given the deal its blessing. Also, in a surprise move, Murchison announced its own – previously undisclosed – 2.7% stake in Midwest.
Some analysts believe that Yilgarn, another China-backed consortium that's backing Midwest, may try to block the deal by making a rival offer. One analyst told the Wall Street Journal that "if these two merged, then there would be no vehicle via which Yilgarn could have a role in the infrastructure. Yilgarn would have an interest, if they wanted to stay in the game, of blocking the merger."
However, comments made by the company would seem to indicate otherwise.
"Yilgarn's exclusive agreements with Midwest Corporation hold us in good stead for a positive outcome with respect to merger or acquisition discussions between miners in the Mid-West," a company spokesperson told The Australian newspaper. "This may finally lead to the combining of forces for the region that Yilgarn has been advocating for the past two years."
If the bid succeeds, Murchison will be Australia's second-largest independent iron miner after Fortescue. Kopejtka, the Murchison chairman, sees this as one of the many compelling reasons for the two companies to join forces. And the market seemed to agree, as it sent Midwest's share price to record highs on Wednesday. The two companies have gone back and forth on the issue of infrastructure for months now. At this point, the quickest and most efficient way to effect progress would be for the companies to strike some sort of alliance, rather than pursuing competing – and mutually exclusive – agendas.
Unfortunately, many analysts see this as yet another instance of Japanese and Chinese interests colliding. In one sense, that's true. But those analysts also note that this particular takeover doesn't look like a cutthroat move by Murchison to eliminate a competitor. Instead, it looks more like a final course of action dictated by business, and not political, mandates – by a company that's determined to free up the ironclad profits of Australia's promising western provinces.
News and Related Story Links:
- The Age:
Iron ore miners fight for port.
- The Age:
- Money Morning Investment Research:
Goldman Sachs Finding Resistance to Deals in China.
- Money Morning Investment Research:
U.S. Global Investors to Focus on Global Infrastructure Investment Opportunities.