Hunan Valin buys A$1.2bn stake in Fortescue
ByRaphael Minder in Hong Kong
Published: February 24 2009 12:49 | Last updated: February 24 2009 12:49
Hunan Valin Iron & Steel on Tuesday joined the swelling ranks of Chinese investors in debt-strapped Australian resources companies by agreeing to buy a 16.5 per cent stake in Fortescue Metals for A$1.2bn (US$780m).
Australia’s third-biggest iron ore producer said on Tuesday that it was also considering an institutional share placement, as well as negotiating a hybrid funding package with China Investment Corp (CIC), the sovereign wealth fund. CIC is understood to be considering an even bigger investment than Valin’s to help Fortescue reduce debt.
EDITOR’S CHOICE
Chinese deals test Australia’s rules - Feb-19Tough times are just beginning at Rio - Feb-15State-owned Valin’s purchase underlines how Chinese groups are seeking to take advantage of funding difficulties and slumping stock market valuations to secure better access to Australia’s mineral riches.
Ahead of Tuesday night’s announcement, analysts at Macquarie had estimated Fortescue would need A$731m in additional capital on top of internally-generated funds to finance its expansion.
Like other recent Chinese investments in Rio Tinto and Oz Minerals, Valin’s purchase will need approval from Australia’s Foreign Investment Review Board. There has been intense political debate in Canberra about the influx of Chinese money.
Li Xiaowei, Valin’s chairman, described Tuesday’s deal as “an excellent example of the close relationship between Australia and China and the opportunities we can unlock together in partnership”.
The transaction gives Fortescue an additional A$558m in cash, as Valin is buying 225m new shares at A$2.48 a share. Valin is also acquiring 275m shares from two Harbinger Capital funds, giving the Chinese group a combined stake of 16.5 per cent and reducing Harbinger’s holding in Fortescue from 16 per cent to 7 per cent.
Andrew Forrest, Fortescue’s chief executive and founder, remains the largest shareholder with 35 per cent.
A person familiar with the negotiations said that Valin stepped in last November, after Fortescue failed to secure an investment from China’s Baosteel. The person said that China’s further involvement in Fortescue was now likely to be limited to CIC, in the form of hybrid or convertible debt financing package.
Lou Jiwei, CIC chairman, met Fortescue management earlier this month during a visit to Australia.
Valin’s purchase could help Fortescue with an institutional placement, which sources said could raise as much as A$500m.
Fortescue stressed that Valin had also signed a “standstill agreement” that would prevent it from raising its stake in Fortescue above 17.5 per cent. Valin was advised by Deutsche Bank.
Fortescue only started production last May, but had ranked among Australia’s most valuable companies on the back of optimism about its expansion plans.
But Fortescue’s shares have fallen 60 per cent in the past year on the back of a downturn in commodities and concerns about its debt financing. The shares, which were suspended on Monday pending an announcement, last traded at A$2.38, giving Fortescue a market value of A$7.95bn.
Copyright The Financial Times Limited 2009
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