US investment company and hedge fund, Harbinger Capital has emerged as the kingmaker in the increasingly complicated Murchison Metals-Midwest Corporation love affair.
Harbinger yesterday emerged as the major buyer of Midwest shares in the past couple of days when it revealed it had built up a stake of 8.1% of Midwest’s issued shares, to go with its 18.98% of Murchison.
The stake in Midwest nicely offsets the stakes rival Sinosteel of China have in both companies: 19.89% of Midwest and a much smaller 2.3% of Murchison.
Harbinger said in a substantial shareholding notice yesterday that it had acquired 8.1% of Murchison, which this week struck a reverse takeover merger deal with its one time target.
Both Midwest and Murchison operate in the growing Mid west iron ore production region inland from Geraldton Western Australia.
Murchison is backed by Mitsubishi of Japan and up to Monday, Midwest had been in China’s camp through its relationship with Sinosteel which had launched two takeover bids for Midwest, the last at $6.38.
But late last week Murchison lifted its stake in Midwest towards 9% and then put together a reverse takeover deal that values Midwest at around $7.36. The offer is all shares, compared to the $6.38 a share cash offer from Sinosteel.
But the reverse takeover will see Murchison shareholders voting on the deal by way of a simple majority vote of 50.01%.
Sinosteel says its $6.38 a share offer is final and has hinted at legal action to protect its position but the appearance of Harbinger in Midwest complicates the matter for the Chinese company.
Further complicating things is the fact that Harbinger (not Harbringer as wrongly spelt earlier this week) owns around 15.7% of Fortescue Metals Group, which Sinosteel is talking about buying a stake in: its possible vendor is Harbinger and there are reports that the US group could sell Sinosteel 8%, or around half its stake in FMG.
Now there is a school of thought that Harbinger and Sinosteel could do a deal that effectively sees Midwest and Murchison fall under Sinosteel’s control, while also picking up some of Harbinger’s FMG stake.
The precise relationship between Harbinger and Murchison and Midwest and Sinosteel is very unclear and needs clarifying by ASIC.
There is considerable logic in Murchison and Midwest joining forces, enabling them to cut costs and share port and rail infrastructure. There will only be one railway and port facility allowed to handle ore from the Mid-west region, according to the WA Government.
Midwest’s board has approved both deals and both Sinosteel and Murchison reckon they are confident of success.
Murchison’s $1.65 billion all-stock offer has a much higher implied value, but Sinosteel claims it expects Murchison’s share price to come down and its $1.36 billion cash offer to prevail. But the Sinosteel offer doesn’t offer shareholders any capital gains tax rollover: Harbinger wouldn’t want that, but other local holders would.
Harbinger is reported to have backed Murchison’s merger plan.
Bloomberg reported that Harbinger Chairman Philip Falcone was quoted as saying in Murchison’s statement on the merger plan on Monday:
"This is a very exciting development, as I believe that combining Murchison and Midwest will underpin the future of this important new iron ore province. I have every confidence that this merger will deliver significant value for shareholders of both companies.”
Midwest rose 2c yesterday to $7.06 while Murchison rose 1c to $4.15 as it recovered from an early weakness.
And, in a statement late yesterday Murchison Metals had this to say (in part) about the Sinosteel statements on Wednesday:
Murchison said it was "very pleased with the market reaction to the merger proposal. Murchison believes that reaction vindicates Murchison’s decision to present the merger proposal to Midwest and also vindicates the decision of the Midwest board to recommend the proposal.
"Murchison also notes that Sinosteel has now declared its $6.38 offer price final and welcomes the fact that the market now has two clear corporate alternatives which are.
- "Accept a cash offer from Sinosteel at $5.60 which is currently approximately 20% below market and hope that Sinosteel receives other acceptances to satisfy its 50.1% condition which would trigger the obligation to pay $6.38 (a price approximately 10% below market).
- "Participate in a merger and share in the short, medium and long term benefits that Murchison believes the merger will deliver.
"The board of Murchison believes that it will be an easy decision for the Midwest board to continue to support the merger and for shareholders of both companies to choose the merger over the capped Sinosteel offer.
"Sinosteel appears not to accept the market’s positive verdict on the proposal. Murchison and Midwest shareholders can be assured that despite an expectation that Sinosteel will attempt to frustrate the merger proposal, Murchison and its advisers are working expeditiously to complete the remaining formalities and document the proposal so that it can be progressed as quickly as possible."
