China Minmetals Corp's loss of exclusive
negotiation rights last week with Canadian Noranda Inc,
Canada's largest mining company, to acquire the latter
in an all-cash deal at an estimated cost of about US$7.5
billion, is only a temporary setback to the grand design
of the Chinese to build a cache of natural resources
across the globe to feed the ever-increasing demand of
industry for energy, minerals and metals.
"As
with many natural resources, China is actively pursuing
investments around the globe to satisfy rapidly growing
needs. In case of oil, for example, the country is
looking at neighboring Russia and Central Asia, as also
well beyond to parts of Africa, including Sudan,"
Washington DC-based Intelligence Energy Economist Dr
James P Dorian told Asia Times Online.
Following
Noranda's unwillingness to renew the negotiation pact
with Minmetals, which it had signed on September 24,
some analysts are concluding that the breakdown in the
exclusive talks can be attributed to delays at the
Chinese end. These sources, who do not want to be named,
state that if the company is unable to clinch the deal
within seven weeks - the exclusive negotiation time,
granted by Noranda to it - then this is reflective of
dithering, bureaucratic indecisiveness and tardy
decision-making that marks the functioning of Chinese
entities. They also predict that this is typically the
kind of problem that would besiege the acquisition, if
it were to go through. It needs to be understood here
that the Chinese buyout of Canadian assets is still
possible as only the exclusive negotiation pact has
ended, not the acquisition talks themselves.
Analysts' assessments of Chinese inefficiency
are being prompted to a great extent by the statements
being made by the main stakeholders. Initially, both
companies had made forward-looking statements. They had
officially confirmed that the negotiation was on, giving
substance to unsubstantiated rumors of the acquisition.
Further, when the public opposition to the acquisition
was strong in Canada, senior Noranda officials made
several calming and investor-friendly statements. They
have also stated that the Canadian investment
authorities would have no objection to the deal
(clearance from the Chinese and Canadian authorities
was, and is, necessary for the merger and acquisition to
go through had the parties concerned being able to
arrive at the price and other details).
However,
when the exclusive negotiation talks broke down last
week, the tone and tenor of the statements changed
slightly. Noranda spokesperson Denis Couture stated last
week, "What is relevant is the fact that after seven
weeks of exclusive negotiations and discussions that
made substantial progress, we were not able to clinch a
deal. We will continue our discussions with China
Minmetals, the difference being that now we will be in a
position to pursue other interests. We'll be able to
respond to the advances of other parties or solicit
other parties, and even look at opportunities on a
stand-alone basis."
Other bidders who could now
well be in the running include Brazilian mining company
Companhia Vale do Rio Doce (CVRD), Australian miner BHP
Billiton and Canadian mining firm Inco Ltd, though some
experts contend that interest in the mining industry has
shifted from Canada to Australia after CVRD expressed
its interest early last week in acquiring the
Melbourne-based WMC Resources Ltd. While this may be the
case, it is possible that Noranda itself may buy back
its stake from Brascan Corp, an asset management company
and the single largest shareholder in Noranda that is
keen on bailing out of nickel and has put its 42% stock
- amounting to 123 million shares - on the block.
The stakes The issues surrounding the
proposed deal transcend the acquisition of assets of one
company by another. Both Minmetals and Noranda are large
entities in their respective segments in their own
countries. These challenges are formidable enough for
any transnational merger and acquisition (M&A), but
what is tickling the interest of industry watchers even
more are the unique dimensions of the deal.
Minmetals is a Chinese government-owned
enterprise. It is China's largest importer and exporter
of steel, non-ferrous metals and mineral products. It
handled 40% of the copper and half the aluminum imported
into China last year. It holds a stake in several
Chinese and Hong Kong-listed companies, but this would
be the first instance of it venturing as far as Canada
to acquire nickel assets by acquiring an overseas
private sector company, that too in a capitalistic
economy. Also, if the deal were to go through, it would
be the largest overseas acquisition by a Chinese
company. The only other deal of similar dimension, point
out analysts, was that of China Netcom Corp when it
acquired Asia Netcom, formerly known as Asia Global
Crossing. However, this deal was much smaller, at about
$1 billion.
If those are the dimensions of the
deal at the Chinese end, the stakes are equally stacked
on the Canadian front. Noranda is Canada's biggest and
best-known mining firm. It has about 15,000 employees
and operations in 18 countries. It has interests in
nickel as well as aluminum, which it manages through
Norandal, its aluminum subsidiary. The single largest
stakeholder in Noranda is Brascan. The asset management
company holds a 42% (123 million shares) stake in
Noranda. It has been making statements for some years
that it would like to exit the nickel business. It has
also indicated that it would like to invest the proceeds
of the sale in real estate and other sectors where it
sees its core competence.
A special
deal The transnational and cross-cultural
dimensions apart, the terms of the deal are complicated
since Brascan would like to retain its holdings in
Noranda's aluminum interests, but would like to exit its
nickel business. Thus, under the sell-off plan, which
had been broadly worked out by Minmetals with Brascan,
the former would pay it about $1.75 billion cash. The
rest would be in the form of a stake in Norandal,
Noranda's aluminum subsidiary. Minmetals, in turn, would
get exclusive access to Noranda's nickel assets, thereby
creating a unique corporate structure - a private sector
subsidiary of a public sector company.
It is
significant that the talks did not reach the price
negotiation stage. The $7.5 billion acquisition price
that is being quoted is an indicative price. The market
capitalization of the Noranda stock is about $5 billion.
Minmetals had stated some time ago that it would acquire
Noranda at a small premium. This has made experts and
analysts conclude that the acquisition price would a $5
billion-plus deal. Add to this the fact that Minmetals
would be raising about $2.5 billion in debt after the
buyout, and you have the analysts' figure of $7.5
billion in acquisition price.
On September 24, a
special committee set up at Noranda to entertain bids
announced exclusive negotiations had begun with
Minmetals, which was eager to expand its portfolio.
"Since that time, Minmetals has been conducting its due
diligence and discussions have been taking place
regarding the terms of a definitive agreement to give
effect to the proposed transaction," Noranda said in a
statement.
"In deciding not to extend the period
of exclusivity, the special committee took into account
the time elapsed since exclusivity was first granted and
was mindful of the current positive metal prices, the
global economic environment for commodities, strong
operational performance and recent exploration
successes," the company said later when the talks broke
down.
Understandably, interest in the deal lies
in its unique dimensions. "Given that the country
[China] places a top priority on continued robust
economic growth, companies will search for and acquire
the natural resources needed around the globe to
maintain strong growth and high employment rates,"
Washington DC-based energy economist Dorian said.
However, the political dimensions and opposition to the
deal come from xenophobia related to a foreign company,
that too a Chinese public sector enterprise acquiring
assets on Canadian soil.
Jayanthi
Iyengar is a senior business journalist from India
who writes on a range of subjects for several
publications in Asia, Britain and the United States. She
may be contacted at jayanthiiyengar1@hotmail.com.
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