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Reuters is reporting that Sinochem won’t proceed with a possible bid for the world’s largest fertilizer maker, Canada’s Potash Corp., currently subject to hostile $39 billion offer from Australia’s mining giant, BHP Billiton. The state-owned chemicals group had been consulting with investment bank advisors about putting together a consortium counterbid, possibly involving several sovereign wealth funds including Singapore’s Temasek. Reuters says its sources say these discussions are dead.
Potash Corp. produces a fifth of the world’s potash. (The picture above is of a Potash Corp. mine in Saskatchewan.) While the industrial logic for a Chinese bid for the leading producer of the nutrient most essential to boosting grain production to meet China’s booming food needs was there, at least for China, any bid that would have given a customer ownership of its supplier, and thus great pricing power, was always going to be looked on askance by the Canadian government. And the more so if the bidder for such a strategic asset was not just foreign but Chinese.
This political sensitivity may have been behind Sinochem’s decision not to proceed — and we should say that Sinochem has made no public pronouncement on any aspect of its intentions in all of this beyond that it is watching the situation with interest. Our suspicion is that Sinochem has no appetite for being involved in a hostile takeover battle. State-owned companies anywhere rarely launch hostile bids and when they do, they usually end up battered and bruised. Sinochem will no doubt remember the $18.5 billion hostile bid for Unocal of California by CNOOC in 2005 which ended with China’s third-largest oil producer withdrawing with its tail between its legs after running into a wall of xenophobia.
The lesson for China’s state owned would-be multinationals is that minority partnering is a more politically adroit way to go, as the state-owned aluminum group Chinalco did in 2008 when it bought into Rio-Tinto in partnership with Alcoa. Though that wasn’t an entirely happy story in the end, it did minimize political opposition to Chinese ownership of foreign natural-resource assets.
Sinochem’s exploration of a consortium bid would have been along the same tactical lines. Even if that particular proposed deal couldn’t be made to work, either because the numbers didn’t add up or the Canadian government was seen as likely to block any foreign-led bid, the thought of taking a stake large enough to have a voice at the table but small enough not to ruffle nationalistic feathers remains sound. A Canadian-led white-knight bid for Potash Corp. is still on the cards to thwart BHP Billiton. If it happens, this Bystander wouldn’t be surprised to see Sinochem as a minority partner yet.
There was obviously some wounded pride following the collapse of Chinalco’s proposed $19.5 billion investment in Rio Tinto. But to add insult to injury, Rio is now proposing an iron-ore joint venture with BHP Billiton in Western Australia.
Such a combination would account for 80% of the exports from one of China’s main sources of supply, Australia. To Chen Yanhai, who heads the raw materials department at the Ministry of Industry and Information Technology, “The potential deal has an obvious color of monopoly. The joint venture is likely to have a big impact on the Chinese steel industry as China is the world’s biggest iron ore importer” (from CCTV via Reuters). “The deal should be subject to Chinese anti-monopoly law,” Chen adds.
That sting in the tail will raise some eyebrows among international M&A bankers. China’s anti-monopoly law says the ministry has to approve business combinations if the joint global revenue of the companies involved exceeds 10 billion yuan ($1.5 billion) or 2 billion yuan in China if two or more of the firms involved each cross a threshold of 400 million yuan of revenue in China during the previous accounting year. Both BHP and Rio have blazed past that. In the year ended June 30, the former’s revenue in China was $11.7 billion while the latter’s was $10.8 billion.
It is unclear what remedies would be imposed if the Rio-BHP deal was found to be monopolistic by Beijing (or even if it could apply such a ruling), but Chen indicated aid to domestic miners could be one. There have already been discussions around this between Canberra and Beijing at the diplomatic level, we hear. And BHP says it and Rio would be discussing the potential regulatory issues with Chinese officials, according to Reuters.
Meanwhile, Chinalco has to decide what to do with the stake in Rio it does hold, and whether to take up its allotment of Rio’s rights issue that is replacing its investment. It could dump its stock with a grumpy flourish and take the loss, not do that but not take up its rights issue allotment, thus diluting its stake, or take up its rights and hang in to see what develops. Patience rather than petulance might well be the right virtue in this instance.
A rare piece of good news for China’s beleaguered steelmakers: BHP Billiton is walking away from its bid for Rio Tinto. Aluminum Corp. of China, Chinalco and other Chinese steelmakers were among the most outspoken about fears that the combination of two of the largest natural resources companies would have too much control over iron ore prices. As we noted in Chinalco Gets Australia’s Limited Nod For Rio Tinto Stake, the Chinese steelmaker went as far as taking a stake in Rio Tinto to ensure it would have a place at the negotiating table.
BHP said the reason for dropping the bid was that asset sales that antitrust regulators in Europe would likely require would have to be done at fire-sale prices and that financing would have been difficult to secure in the current global financial crisis. Further, servicing the high level of debt that would have been involved would have been risky at a time of tight credit and diminished cash flows following the collapse in world commodity prices.
One sign of the impact of the crisis on the all-share bid is that its value had fallen from $140 billion when it was made a year ago to $66 billion now.
Australia is walking a fine line over Chinese investment in its natural resources. It has approved Chinalco’s recent purchase of a minority stake in Anglo-Australian miner Rio Tinto, but said any further share purchases will require prior approval. Nor can Chinalco have a seat on Rio’s board, Wayne Swan, Australia’s Federal Treasurer, ruled on Sunday.
State-owned Chinalco, along with the U.S.’s Alcoa, has been buying what they say is a target 14.9% stake in Rio, the subject of a $164 billion takeover bid from BHP Billiton. The pair said in February that they had paid $14.1 billion for a 12% stake in Rio’s London-listed shares, or 9% of the total group. As a consumer of iron ore in particular, China doesn’t like the prospect of so much supply being concentrated by the merger of the world’s no 2 and no 3 products.
Approval of the share purchases to date was expected, despite some muttings that Australia was leaning towards backing off its open-to-foreign-investment stance. The Australian government does seems to have used the ruling to set a ceiling on what it it considers an acceptable level of Chinese investment, and that may mean Chinalco won’t end up with a large enough shareholding to have a material affect on the outcome of the Rio-BHP bid.
The other point in all this is that while China is still an important market for Australian natural resources, taking 20% of Australia’s output, Australia is getting relatively less important as a supplier as China’s needs continue to grow and China’s companies turn to mines in Africa and South America. Rio and BHP operate on those continents, too. The Australian government may be walking the wrong line.
Reports from Australia ahead of that country’s prime minister’s visit to Beijing that China wants to elbow its way into the takeover by BHP Billiton, the world’s largest mining company, of its rival Rio Tinto.
In February, it acquired a 9.3% stake in Rio for $14 billion through state-owned Chinalco. Wanting to secure raw materials for its steel industry, Chinese officials have been concerned that BHP’s $135 billion bid for Rio would lead to the merged group having too much power in negotiating prices. The price of iron ore has jumped fivefold since 2001, while coal prices are more than twice last year’s levels.
Baosteel has repeatedly been touted as a BHP bidder, but it would be a financial stretch even for China’s leading steelmaker. Just a 9% stake in BHP could cost upwards of $20 billion.
A consortium bid, if one is to materialize, seems more likely. And a consequential minority stake is more likely than an outright bid. Offshore investors must gain Australia’s Foreign Investment Review Board approval to buy more than 15% of a local company. Entities judged to be backed by Sovereign Wealth Funds cannot buy any shares without FIRB approval.
There are plenty of other deals for Prime Minister Kevin Rudd to talk about during his visit, too: Sinosteel Corp last month offered A$954 million for iron ore miner Midwest Corp, while China Metallurgical Corp has agreed to pay $300 million to buy a Cape Lambert Iron Ore Ltd project. Shougang, China’s fourth-largest steelmaker, already holds an 8.4% stake in Australasian Resources Ltd, which is developing an iron ore mine in Australia, all of which is making some Australians call for tighter regulation of foreign investment in the country’s natural resources.
State-owned China National Offshore Oil Co (CNOOC) ran into a wall of xenophobia that stopped dead its bid for the U.S. oil company Unocal in 2005. With the world even more sensitive to China’s global scavenge for natural resources, state-owned Aluminum Corporation of China (Chinalco) is seeking to preempt similar objections to its investment in Australia’s Rio Tinto.
Chinalco has taken a 9% stake in Rio in partnership with Alcoa of the U.S. Rio is trying to fend off the $140 billion takeover interest of fellow Australian miner BHP Billiton, prompting speculation that Chinalco might make a bid or be positioning itself to buy Rio’s aluminum assets, notably Alcan. A 15% stake would trigger a review under Australia’s inward foreign investment rules. BHP has to make a formal bid Wednesday or walk away for six months under takeover rules.
Though still shy of that, Chinalco has voluntarily submitted itself to an informal review. Australia Prime Minister Kevin Rudd and Foreign Minister Stephen Smith met Foreign Minister Yang Jiechi and Natural Resources Minister Martin Ferguson met Chinalco president Xiao Yaqing in Canberra this morning to discuss the investment.
Any deal that leaves a state-controlled foreign company controlling significant Australian natural resources would potentially put Australia in a delicate position with one of its leading trade partners. The government has been dancing around the question of whether either a bigger Chinalco stake or a full bid would fall foul of national-interest provisions of the foreign investment rules.
In 2001 John Howard’s government blocked Royal Dutch Shell’s planned $9.1 billion takeover of Woodside Petroleum, the Australian oil and gas group, on just such grounds.
Meanwhile, on a much smaller scale Sinosteel looks set to by Australia’s iron-ore miner Midwest Corporation for $1.1 billion, now Murchison Metals, the Australia-listed mining group backed by Mitsubishi of Japan has abandoned its bid. Sinosteel has made a highly conditional offer for Midwest but has yet to make a formal bid despite building a 20% stake.
One final thought: if Chinalco does end up buying Alcan off a merged BHP-Rio, that will likely trigger national-interest reviews from the Canadian and French governments. More delicate dancing to come.
Already nervous about the proposed $100 billion-plus merger between two natural resources giants, BHP Billiton and Rio Tinto, China, one of the world’s biggest consumers of the iron ore, aluminum and other minerals that BHP and Rio Tinto dig up, has jumped in with both feet.
Aluminum Corp. of China (Chinalco) and the U.S.’s Alcoa staged a joint dawn raid on Friday to grab 9% of Rio Tinto, paying $14 billion for the stake, a 21% premium on the closing price of Rio Tinto’s shares the previous evening. The purchase is one of the largest overseas investments by a Chinese company and comes just days before a Feb. 6 deadline for BHP to table a formal bid or walk away.
Question is, is this a defensive move in case a BHP bid for Rio Tinto goes ahead, a spoiler, or an offensive move in the event any bid lapses or fails or if Rio Tinto looks for a white knight. Short of a full takeover, Chinalco could simply be trying to put itself in a strong position to negotiate for Rio’s aluminum assets if BHP does buy Rio.
That, indeed, may be its endgame (and explain Alcoa’s presence). For now, though, Chinalco and Alcoa are keeping all options open.
Filed under Economy, Markets