Mining saga highlights pitfalls of Chinese M&A
By Peter Thal Larsen
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
Sundance Resources is a case study in what ails Chinese-led takeovers. The Australian miner’s deal to sell itself to Hanlong Mining for $1.4 billion is under pressure after its suitor’s chairman was apparently arrested. The 18-month saga highlights the hurdles facing Chinese bidders, and explains why suitors are often met with scepticism.
The arrest of Liu Han by Chinese authorities, reported by Shanghai Securities News on March 20, is a dramatic turn. Sundance’s CEO is “not confident” the Chinese company will meet a March 26 deadline to prove it has the financing for the deal. However, it is merely the latest in a series of setbacks.
Regulators were the main obstacle. China’s National Development and Reform Commission, which must approve virtually all foreign takeovers, last year asked that Hanlong pay a “reasonable acquisition price” for Sundance. Even after the Chinese company cut its offer 10 percent to A$0.45 a share, the NDRC decided Hanlong needed a large Chinese partner.
Financing is another problem. When Hanlong first struck the deal, it didn’t have the funds to complete the takeover: it wasn’t until October 2012 that China Development Bank “in principle” agreed a $1 billion debt facility. That still hasn’t been finalised.
Finally, there’s patronage. Political support is almost impossible for outsiders to gauge, and can shift quickly. Until now, Liu was sufficiently in favour that he was allowed to buy a controlling stake in another Australian group, Moly Mines, and sign a deal to help a U.S. company mine molybdenum in Nevada.
Sundance may have been right to entertain Hanlong’s bid despite these concerns. The $5 billion needed to develop its iron ore project in central Africa was always most likely to come from China, and the authorities tend to discourage Chinese companies from bidding against each other. Despite the company being free to seek other offers, none have emerged.
Sundance shareholders are pricing for the worst. The company’s shares were suspended on March 19 at 22.5 Australian cents – half the value of Hanlong’s bid. The latest setback could not have been foreseen, but more scepticism at the beginning would have spared them recent pain.