By staff reporter Zhao Jianfei

Sinosteel, one of China's largest steelmakers, hiked its offer for Midwest Corp. Ltd. to streamline a planned takeover of the Australian iron ore supplier. The new offer of AU＄ 6.38 per share, up 14 percent from the original AU＄ 5.60, helped Sinosteel win over Midwest's previously reluctant board.

If a majority of Midwest shareholders approve Sinosteel's AU＄ 1.36 billion buyout plan in June, the deal would be China's first takeover of an overseas resources company and mark a successful step in the country's effort to secure iron ore supplies for its busy steel mills.

An insider close to the deal told Caijing that Sinosteel's proposal was aimed at blocking rival takeover attempts by another Australian miner, Murchison Metals, and protect the steelmaker's cooperation with Midwest.

Murchison, a major Midwest rival in the scramble for Australian ore, tried to buy Midwest in October through a share exchange. The two companies had been competing for regional port and rail construction projects.

But to win the infrastructure projects, Midwest set up a partnership with the Australian construction company Yilgarn Infrastructure, whose investors include Sinosteel and four other Chinese enterprises. Midwest and Sinosteel are also jointly developing the Weld Range and Koolanooka iron ore projects in Australia, which are expected to start operations in 2011.

People familiar with the Midwest buyout plan told Caijing that Sinosteel sought to block Murchison by talking with major shareholders of Midwest about a takeover bid. However, Sinosteel's first offer failed to satisfy a group of top shareholders led by the Midwest board's Vice Chairman David Law, who holds a 40 percent stake.

Huang Tianwen, Sinosteel president, told Caijing that after the first takeover proposal hit a brick wall, Sinosteel decided to start buying Midwest shares on the open market.

“It was not a hostile takeover,” Huang said. “It was actually a no-agreement takeover.”

Sinosteel started buying a small number of Midwest shares in November through its affiliates Sinosteel Australia Mining PTY Ltd. and Sinosteel Ocean Capital PTY Ltd. The steelmaker accelerated the purchases after its move was approved by the Australia Foreign Investment Review Board in January.

Sinosteel reportedly held a 10 percent stake in Midwest as of January 25, and increased its holding to 19.89 percent by February 19 -- settling at just below the 20 percent threshold for a full takeover. It paid an average AU＄ 5.30 per share.

An insider told Caijing that Sinosteel hoped to block Murchison while pressuring Midwest to negotiate a buyout. The plan soon appeared to be working: Only 2 percent of Midwest's shareholders accepted a Murchison takeover by the February 6 deadline for its offer.

Sinosteel officially raised its takeover offer to AU＄ 5.60 on March 14 after securing a financing pledge from the China Export-Import Bank. But the offer was rejected by Midwest's board. After more negotiating, Sinosteel raised the offer to AU＄ 6.38 and won the board's approval. Investors responded by bidding up Midwest's share price to a record AU＄ 6.28 on May 5.

But is the deal in the bag? People familiar with the buyout plan told Caijing that Sinosteel officials are cautiously optimistic about obtaining Law's majority stake. The takeover deadline is June 5.

“It is still hard to say whether the takeover will succeed or not,” Sinosteel chief Huan told Caijing. “But I hope it can be achieved.”
 
In addition, industry insiders have warned Sinosteel about risks tied to a takeover, since the value of Midwest's future ore assets is hard to predict. Some company mines are still three years away from launch. However, Huang thinks China's growing demand for resources will create opportunities for Sinosteel.　

Sinosteel, which has other investments in Australia and Zimbabwe, posted 111.2 billion yuan in revenues from major businesses and 2 billion yuan in profits last year.

1 yuan = 14 U.S. cents