By staff reporter Zhang Bolin

“Try to be among the top three in your industry; otherwise, the State-owned Assets Supervision and Administration Commission will find you a babysitter,” Li Rongrong, SASAC chairman, once said in 2003.

That remark has never been far from the minds of managers of enterprises controlled directly by the central government. Those companies know that if they don’t excel, they will be acquired by other giants in their industry.

Major players in the domestic steel industry have been in SASAC’s sights as it reshuffles the sector. One of the four large steel groups -- Baosteel, Anshan Steel, Wuhan Steel and Panzhihua Steel Group (Pangang) -- is fated to be acquired by or merged with another company, leaving only the “top three” that SASAC wants.

A Caijing reporter has learned that SASAC and other relevant government bodies such as the National Development and Reform Commission (NDRC) had decided to let Baosteel merge with Pangang as early as the beginning of this year. A source close to Pangang told Caijing that only Baosteel has enough capital to help Pangang realize its development ambitions.

Pangang has its own plan. It wants to integrate several publicly listed subsidiaries and their assets. The scheme has two steps: first, buy outstanding shares of its two public subsidiaries, then merge those with Pangang Gangfan.

For small shareholders in Pangang’s three listed subsidiaries who prefer to sell instead of swapping their holdings into the merged firm, Pangang would appoint a guarantor, who would pay shareholders a premium for their stocks and assist Pangang’s integration plan.

Baosteel was not granted the rights to be the guarantor and buy up shares of Pangang’s subsidiaries, because policy-makers were worried that “it might bid up stock prices and increase the cost of restructuring,” a source revealed.

Instead, Anshan Steel got the deal from Pangang. The stock market’s sharp decline this year has given Anshan Steel the opportunity to build up holdings cheaply in the three subsidiaries. And that made Anshan a major competitor against Baosteel in the latter’s attempt to merge with Pangang.

It has been confirmed by several sources that the SASAC and NDRC still consider Baosteel the best-placed company to help restructure Pangang.

Seen in this light, Anshan Steel’s action is a direct challenge to the central regulators’ will. At the dawn of China’s steel industry overhaul, a possible merger with Pangang offers the opportunity of a great leap forward for Baosteel, Anshan Steel and even Wuhan Steel. They’ll all do their best to seize the opportunity.

A showdown between SASAC’s intentions and market forces could be looming.

Anshan Steel, the Rising Competitor

“Pangang had intended to complete the integration” before October 2007, but its plan was delayed by approval procedures,” a Pangang source told Caijing. October was the peak of China’s stock market.

The complicated integration plan was finally approved by the State Council, China’s cabinet, on April 14, 2008. To ensure a smooth transfer, Pangong offered its three listed subsidiaries a “cash option” plan, which would allow shareholders to sell their shares to an assigned company at an above-market price.

Pangang’s first choice was Baosteel. The Pangang source told Caijing that SASAC had already chosen Baosteel to restructure Pangang, since Baosteel was the only company that could afford at least 50 billion yuan to establish a new steel factory with a capacity of 5 million tons in Xichang, Sichuan Province before the plan of Pangang’s overall listing was publicized.

However, it was SASAC that blocked Baosteel from being the assigned buyer of the subsidiaries’ stocks. Although by late August the stock market had fallen to one third of its October peak, SASAC wanted the share prices to be even lower, which would help Baosteel’s merger with Pangang.

Still, an assigned buyer was necessary for Pangang’s overall listing plan to be approved. So Pangang turned to Anshan Steel. Finally, Anshan Steel agreed to buy tradable shares from PZH Steel (000629.SZ), Chongqing Titanium (000515.SZ) and Sichuan Changcheng Special Steel (000569.SZ) at 9.59 yuan, 14.14 yuan and 6.5 yuan, respectively.

Currently, shareholders other than Pangang and its related companies hold 55.28 percent, 74.62 percent and 44.07 percent of those three subsidiaries. If most of those shareholders choose to sell their holdings to Anshan Steel, then Anshan Steel will be the largest -- and the controlling -- shareholder of PZH Steel.

“Anshan Steel did not mean to ‘grab’ the stocks; they just wanted assist the integration,” a Pangang insider said. Or as Zhang Xiaogang, Anshan’s board chairman said in May: “We just wanted to help.”

Nevertheless, PZH Steel shares dropped below Anshan Steel’s offering price in June. If the bear market continues, many shareholders will choose to sell to Anshan Steel, which could become a major shareholder. The SASAC’s plan to merge Baosteel with Pangang will be put to the test. Based on the current price of the Pangang subsidiaries’ shares, it will cost Anshan 1.75 billion yuan to complete the deal.

Sun Yong, an analyst at Galaxy Securities, pointed out that Anshan Steel’s action is not intended for an acquisition, because “the cost is too high for it to conduct the deal in the secondary market.” And it would be much easier to let SASAC, the big shareholder of all the major steelmakers, transfer the assets from one company to the other.

A source close to the NDRC told a Caijing reporter that Anshan Steel has not made much progress in recent years and only has a small domestic market share. Although Anshan Steel is trying to set up new steel factories in Fujian and Lianyungang, “it’s not a cakewalk to establish new steel factories,” the source said.  

As Pangang is thirsty for funds to expand its production, restructuring Pangang will be difficult for Anshan Steel, which itself “lacks money”. The purchase of shares of Pangang’s subsidiaries is more likely an answer to the call from Pangang for temporary help in the integration process.

Baosteel’s Next Move

Rumors have spread that Wuhan Steel is also interested in Pangang. As early as 2006, Deng Qilin, general manager of Wuhan Steel, expressed his company’s wish to be the one that restructures Pangang.

Industry insiders don’t see much chance of a Wuhan Steel-Pangang merger, although Wuhan has long had its sights set on Pangang.  

A Wuhan Steel merger with Pangang “can optimize the industry structure of Pangang to create a mutually complementary environment. It can give full play to Pangang’s advantages of resources and possession of the southwest regional market,” said Deng in 2006 in Beijing.  

There is also a managerial connection. Pangang’s board chairman, Fan Zhengwei, used to work for Wuhan Steel and became board chairman and party chief of Pangang in June, 2006. Nevertheless, insiders revealed that Fan “was very angry” about Deng making his wish to restructure Pangang public without his consent.

Source from the NDRC told Caijing that the management team of Pangang is not willing to have the company be merged with Wuhan Steel. Instead, said the source, “Pangang’s senior managers prefer Baosteel,” which is also SASAC’s wish.

Could SASAC be about to get its wish? On August 10, its chairman Li Rongrong told a press conference on state-owned enterprise (SOE) reform that the restructuring process for centrally controlled SOEs will change. He said the SASAC, rather than enterprises themselves, will be responsible for driving the restructuring process.

In the meantime, Pangang and Baosteel seem to be taking a breather from merger activities and making some plans of their own.

On July 28, Baosteel announced the establishment of its Steel and Iron Development Planning Committee. Xu Lejiang, Baosteel’s board chairman, told the committee’s first plenary conference that Baosteel should coordinate its development in different regions. He added that the company should achieve annual production capacity of 80 million tons. Baosteel’s current capacity is only 20 million tons, in addition to a 10-million-ton new project in Zhanjiang, Guangdong Province. Baosteel will need acquisitions and mergers to reach the 80-million-ton goal.

“There is no doubt that Baosteel will take these actions,” An insider close to Baosteel’s top management confirmed to Caijing. He said that SASAC has decided in principle that Baosteel should be the company that restructures Pangang. But no details have been announced yet.

As for Pangang, insiders told a Caijing reporter that Fan’s top priority right now is the integration. The choice of a future partner will depend on what company can help Pangang increase its production capacity and develop further.