BY ALEX WILSON
MELBOURNE-Rival iron-ore developers Murchison Metals Ltd. and Midwest Corp. announced a proposed linkup that ultimately would see Murchison take control of the combined entity through a reverse takeover that trumps an earlier recommended A$1.36 billion (US$1.31 billion) bid for Midwest from China's Sinosteel Corp.
Under the proposal that values Midwest at A$1.53 billion, 0.575 Midwest shares will be exchanged for each Murchison share. This values each Midwest share at 1.74 Murchison shares, or A$7.17 apiece, based on the average price of Murchison shares over five days.
Murchison and Midwest have adjacent iron-ore projects in the Midwest region of Western Australia. The pair said bringing the two together would deliver significant synegies, without putting a dollar value on these.
The proposed merger, which requires shareholder approval, would be carried out through a reverse takeover in which Murchison shareholders would be offered Midwest shares, but with Murchison holders ending up with 52.2% of the merged entity and Midwest with 47.8%.
Midwest's board recommends Murchison's merger deal, which it said offers a premium to Sinosteel's offer. Midwest said the proposal represents a 15% premium to Midwest's share price over the past five days and a 12% premium to Sinosteel's allcash offer of A$6.38 a share.
However, in an unusual move, Midwest also is maintaining its recommendation of Sinosteel's offer. "We are recommending [the merger] as a proposal that has, on the face of it, value for shareholders. But what we are not doing is changing our recommendation on the Sino cash bid-the two are existing in parallel," Midwest Chief Executive Bryan Oliver said.
Mr. Oliver said Midwest won't alter its recommendation of the Sinosteel bid until all the implications of the merger proposal have been fully assessed, particularly the market reaction to the news. In the meantime, shareholders have the flexibility to accept the Sinosteel offer, sell on market or support the merger.
Murchison said the reverse-takeover structure is designed to help prevent Sinosteel from blocking it with its 19.9% interest in Midwest, as the deal will require only 50% shareholder approval.
"We believe this offer will be very well supported in the market and that shareholders in both companies will win out of the result户 said Murchison Executive Chairman Paul Kopejtka.
Shares in Murchison rose 9.7% to A$4.43, while Midwest shares jumped 12% to A$7 in an Australian market that ended down 1.1%.
Murchison has sweetened its offer significantly from a failed bid it launched last year, which was pitched at one new Murchison share for every 1.08 Midwest shares held. That offer would have delivered Midwest 32% of the combined entity, compared with the latest proposal's 47.8%.
Sinosteel has made an aggressive push into Western Australia's Midwest region as it moves to secure iron-ore offtake for its steel mills. Some analysts said the Chinese company is unlikely to walk away and could launch a higher bid for Midwest or wait for the merger to proceed and bid for the combined entity.
A representative for Sinosteel said: "Sinosteel has 19.89% of the shares in Midwest Corporation, making it Midwest's largest shareholder, and will review today's announcement [from Murchison and Midwest] carefully before determining its response." The person added, "Sinosteel is also of the view that its offer... provides the certainty of cash in a challenging environment."
Regarding the possibility of Sinosteel increasing its offer, a person familiar with its bid said: "Sinosteel, which had secured a bank loan to fund its offer for Midwest, has yet to decide what its response will be. Declaring its current offer to be final or letting its current offer expire, are also possible courses of action."
Murchison's Mr. Kopejtka said the higher offer had in part been prompted by Midwest's recommendation of the Sinosteel offer and on a growing appreciation of the synergies of bringing the two companies together.
Under the merger proposal, Mr. Kopejtka would be chairman of the combined group while Murchison Chief Executive Trevor Matthews would be managing director.
-Nisha Gopalan in Hong Kong
contributed to this article.
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