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Murchison Metals and its former takeover target, Midwest Corp Ltd have agreed to merge in a $1.5 billion paper deal.
Both companies called trading halts yesterday after Murchison Friday upped its stake in Midwest to 9.98%, through buying $70.2 million worth of Midwest shares. The 11 million shares were bought at $6.38 each, and boosted Murchison’s existing stake of 4.78% to one where it could possibly block the takeover by Sinosteel of China, which has a $6.38 a share cash bid on the table.
The deal yesterday tops that as it values Midwest at $7.17 a share, a 12% premium to Sinosteel’s offer price.
Both Midwest and Murchison are competing to build a multi-billion dollar mine, port and rail project to ship ore to Japan and China from the mid-west region of Western Australia.
The merger is to be implemented via a Murchison scheme of arrangement, with Midwest remaining the listed ASX entity. Midwest will bid for Murchison via the scheme, a reverse takeover, if you like.
That way Sinosteel will not be able to block the merger. It only has less than 3% of Murchison and the shareholders in that company will be the ones who vote on the deal. Had it been Midwest then Sinosteel would have held the whiphand with its 19.8% stake.
By having the Murchison shareholders vote, it will only require an ordinary resolution for approval. That requires a 50.1% vote in favour, instead of the more complicated rules if it was Midwest shareholders who had to vote. Those rules would allow Sinosteel to block the proposed deal.
Murchison dropped its $900 million bid for Midwest in February after shareholders in the target company spurned its advances: so Midwest shareholders have seen the value of their company rise by two third in four months!.
In April Midwest in April backed a $1.36 billion takeover bid from Sinosteel Corp, China’s largest iron ore trader, which improved an earlier offer to $6.38 cash for each Midwest share.
That was after Sinosteel had launched a hostile $5.60 cash offer for Midwest in March. That valued Midwest at $1.2 billion and came after the two companies couldn’t agree on the details of an earlier, non-hostile proposal from Sinosteel, also valued at $5.60 a share.
Sinosteel has said it will use its 19.9% of Midwest to block other bids.
The steps the two companies have now taken will make sure that doesn’t happen. Sinosteel’s stake will be watered down with Murchison shareholders owning around 52% of the merged company and Midwest shareholders the rest. Sinosteel’s stake will be around 8% or so.
In a statement yesterday the companies said the merger terms were: 0.575 Midwest shares for each Murchison share and option on issue which gave an value of $7.17 per Midwest share. That’s claimed to be a premium to the Midwest price before the bid and a 12.4% premium to Sinosteel’s $6.38 cash offer for each Midwest share (conditional on Sinosteel receiving acceptances of at least 50.1%).
Midwest shares traded at $6.25, while Murchison last traded at $4.04 before the halts were called. Midwest shares traded up to $7.10 when they relisted and finished 12% higher at $7.00. Murchison shares rose 10% and closed up 39 cents at $4.43.
The Midwest Board said it unanimously recommends the new 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," the statement from the two companies said.
Sinosteel has been leading the push by Chinese steelmakers and traders to secure access to the steel making commodities by forming joint ventures or buying into a number of junior companies, particularly in WA.
It is said to be looking to buy an 8% stake in Fortescue Metals Group.
Murchison and Midwest operate modest iron ore operations in Western Australia’s mid-west region (east of Geraldton) and are looking to develop much larger operations, depending on the construction of supporting infrastructure.
Murchison has a partnership with Japan’s Mitsubishi group and, like Midwest, plans to build railways and a port from scratch to tap the vast reserves of iron ore in the mid-west region of Western Australia.
That involvement of the huge Japanese trading group sets up an interesting tension with China. Like China, Japan is paranoid about resource supply, probably more so given that China at least has lots of resources and Japan has none.
Sinosteel will feel like its being ganged up on by Australian companies. It has tried to do a deal with Murchison as well but got knocked back.
