By staff reporters Li Jing, Li Qiyan and Yu Ning

Shanghai-based Baosteel Group Corp., China’s largest steel maker, has launched a hostile takeover bid for Hebei-based Handan Steel. This marks the first such attempt in the domestic A-shares market.

On June 1, Handan Steel, the 11th largest steel producer in the country, announced that Baosteel and two of its affiliates, Shanghai Baosteel Engineering Technology and Shanghai Baosteel Industrial Testing, had bought a combined total of 138.2 million shares. The next day, the Handan Iron and Steel Group, Handan Steel’s parent company, fought back, saying it would spend 1.5 billion yuan (US＄187.5 million) to buy back 700 million Handan Steel shares from the open market.

Baosteel explained that the move was part of its financial investment strategy, but noted that it has yet to map out further acquisition plans.

Baosteel’s actions went against market speculation. Analysts have been predicting a takeover of Handan Steel ever since the company concluded its share-merger reform, which made its previously non-tradable state shares tradable in March.
As of April 20, the Handan Iron and Steel Group, Handan Steel’s state-owned parent company, held 59.06% of the firm’s listed capital.

According to the share-merger plan, however, the parent group’s stake could diminish to 25.56% because of stock options promised to individual investors after the reform’s completion. The options can be used to purchase a certain number of shares after one year. Handan Steel, on the other hand, has been hit with a cash shortage, which, when considered together with the company’s low stock prices, would make it an easy target for a hostile takeover.

Open documents show that Baosteel did take a series of initiatives to acquire Handan Steel shares. It controls a large quantity of the steel maker’s stock options, which enables it to buy Handan shares in the future. It has also been buying Handan Steel tradable shares in the A-share market since January. Consequently, Baosteel potentially controls up to 10.3% of Handan Steel shares. Analysts say if Baosteel continues to purchase Handan Steel stock options and tradable shares in the open market, the company may end up upsetting the current share-holding structure of Handal Steel.
Baosteel in the last year has been buying shares of other steel makers amid industrial merger and restructuring waves in the domestic steel-making sector. It has signed investment contracts with Zhanjiang Steel and Bayi Steel. According to a Goldman Sachs analyst, given Hebei’s strategic position in China’s steel-making industry, it is no surprise that Baosteel has turned its eyes to Handan Steel.

Handan Steel is planning to expand its production capacity. “We… may cooperate with large-scale steel makers,” said a high-ranking manager of the company. “We have always been on good terms with Baosteel so it is normal for us to discuss any cooperation plans with them.” He denied that the two sides had any contact concerning Handan’s takeover.
However, a senior Baosteel official told Caijing: “We discussed the matter with the relevant government agencies; otherwise, we wouldn’t have made the move.” He added that some “unexpected changes” occurred later on, which disrupted Baosteel’s plans to obtain full government blessing for the acquisition.

Caijing has also learned that Hebei provincial government officials are wavering on Baosteel’s move. There are signs that Baosteel negotiated with the provincial government to acquire Handan Steel. It also began purchasing Handan shares in the open market to pressure the Hebei government. But analysts say that the anti-takeover manoeuvre the Handan Iron and Steel Group adopted on June 2 demonstrates a shift in thinking in Hebei authorities. Analysts explain that it would now be difficult for Baosteel to forcibly impose a hostile takeover; the two sides need to conduct more in-depth negotiations and it is entirely possible that they will reach a strategic cooperation agreement instead.

“Acquisition is for operation, which will depend on local resources,” said a Baosteel manager. “We at least need an independent stance from the local government.”
The Hebei government, while aware that Baosteel’s takeover will bring technology, capital and managerial expertise to Handan Steel, worries that it would disrupt the local steel-making business. In 2004, the provincial government tried to consolidate the local steel-making industry, forcing companies into two groups based in the southern and northern parts of the province before they would be merged into a larger Hebei provincial steel-making group.

Guo Gengmao, vice-governor of Hebei, told Caijing late last year that the southern project, centered on Handan Steel, did not go smoothly. Xingtai Steel and Shijiazhuang Steel, which should have merged with Handan Steel to form the South Hebei group, found new cooperative partners instead, selling their controlling shares to two Hong Kong companies. Baosteel’s takeover would mean the scrapping of Hebei’s consolidation plan, said an insider close to the Hebei state asset management body. Moreover, the recent rise in steel prices may have further complicated the situation.

The Baosteel takeover, if it comes, may also encounter resistance from Handan Steel staff, say insiders. Another obstacle is the relationship between Baosteel and the local government. “Most board directors of local steel makers, for example, are appointed by the provincial Party Standing Committee,” said a senior manager at a Hebei steel plant. Besides, analysts say, such a cross-regional restructuring effort may present difficulties in tax distribution and further complicate the deal.

Industrial players and the central government agree that industrial restructuring is necessary to enhance China’s steel-making prowess. But much depends on the local governments, whose stance remains unclear.

“We are certain about the direction of our restructuring, but there are many things that can happen in the meantime,” said a steel company manager who wishes to remain anonymous. “The key is who controls what, or how our personnel will be arranged (after the restructuring).”