Baowu Steel Will Need to Fork Out Extra $654 Million to Take Over Peer
China’s biggest steel producer will not get a free lunch if it goes through with gobbling up a smaller state-owned peer, as regulators rejected its bid to get out of having pay an additional 4.5 billion yuan ($654 million) to buy out shareholders of its Hong Kong-listed arm.
State-owned leviathan Baowu Steel Group has been eyeing a takeover of Magang Group Holding Co. Ltd., for around a year, in a move that would take its total steel production capacity from 70 million tons to 90 million tons, gaining ground on world-leading rival Arcelor Mittal SA’s 113 million tons and moving forward a government push for industry consolidation.
Baowu intended to take a 51% stake in the state-owned company currently held by Anhui province’s branch of the State-owned Assets Supervision and Regulatory Commission (SASAC), according to a plan announced at the beginning of June. This would give it an indirect 45.54% stake in its Hong Kong-listed subsidiary, Maanshan Iron & Steel Co. Ltd. However, according to Hong Kong’s rules for mergers and acquisitions, if a buyer purchases more than 30% of the shares in a listed company, the buyer must also purchase all the shares available on the open market.
Baowu filed for an exemption from the ruling in a move that would have allowed it to take the majority stake in Maanshan without having to go through with the open market buyout, but the Hong Kong Securities Regulatory Commission announced they had rejected it on Monday. Baowu’s Hong Kong-based investment arm will purchase 20% of the company’s total shares from public holders for 4.5 billion yuan, Maanshan announced in a filing with the Hong Kong stock exchange on Tuesday.
The Hong Kong Securities Regulatory Commission rejected Baowu’s argument that since it and the Anhui branch of SASAC had been working in concert for a substantial period, the transfer of shares did not constitute a significant change of ownership for Magang. Yet there was no clear evidence of this, the regulator seems to have decided, and added that in general SASAC does not manage assets held at the provincial level.
The merger is in line with the government’s drive, outlined in its five-year plan, to consolidate the steel industry. It wants 60% of capacity to be handled by China’s largest steelmakers by the end of the decade. But the deal still needs to pass an anti-monopoly investigation, the CSRC said.
China produced 231 million tons of steel during the first quarter of the year, a year-on-year increase of 9.92%. Many industry experts worry that efforts to control output in the country that produces over half of the world’s steel are failing.
This article has been edited from the original version to clarify that regulators rejected Baowu’s exemption from buying out shares in the listed subsidiary Maanshan, rather than Magang, which is the state-owned unlisted entity.
Contact reporter David Kirton (email@example.com)
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