Is the market losing faith with the success rate of takeovers involving Chinese bidders?
The share prices of resources plays Discovery Metals and Sundance Resources, both being wooed by Chinese suitors, seem to suggest as much.
Despite Discovery, which operates a copper project in Botswana, proving more open than it once was to discuss the Chinese-funded Cathay Fortune’s $820 million bid, the Brisbane-headquartered explorer’s share price has fallen to $1.15, well below the bid price of $1.70 a share.
Sundance, the owner of an untapped iron ore deposit in Cameroon and the subject of an altogether more protracted takeover bid from Sichuan Hanlong, is trading at a similarly significant discount to the Chinese group’s indicative bid of 45 cents a share, worth about $1.3 billion.
And it is a big week in the fortunes of both takeovers.
After an initially bristly courtship, Discovery – at the behest of its major shareholders – now appears to be bending over backwards to accommodate the Chinese interest, including facilitating a “technical briefing” to help clear up any lingering queries that might be holding up the purse strings.
Shares in Discovery are down 11.5 per cent in midday trade, after Cathay said it needed another seven days to conduct due diligence due to ‘‘material concerns’’ with the grade of copper at the pit, disclosed in Discovery’s target statement last week.
At current levels, the market is pricing in a two-in-three chance that the deal will fall through.
Perhaps part of the apprehension stems from Hanlong’s somewhat farcical pursuit of Sundance. The protracted takeover has stretched over 18 months, a reduction in the bid and numerous extensions due to Hanlong’s repeated failures to secure financing commitments.
The situation could be resolved as soon as today, but again, with Sundance entering a trading halt at 35 cents a share, investors aren’t holding their breath. Instead, market speculation is that the deal could be pushed out by a further month.
Another case is the indicative bid for coal seam gas player WestSide, said to be from petroleum giant PetroChina. Shares are hovering at about a 30 per cent discount to the indicative 52 cents a share offer.
“I think there probably is a heightened degree of investor concern around deal completion with Chinese counterparties,” one source familiar with the Discovery deal told BusinessDay.
The moniker “China Inc” can sometimes be overused when referring to the Chinese funds involved in cross-border takeovers. But there are clear parallels in what both deals are trying to achieve, and reason for some cautious optimism that the deals could still prove successful.
Cathay Fortune, headed up by Hong Kong billionaire Yu Yong, is backed by the China Africa Development Fund, which in turn is funded by the state-owned policy bank, the China Development Bank.
China’s rise as a economic superpower has intricate ties to the CDB, run since 1998 by Chen Yuan, a so-called “princeling” as the sone of Chen Yun, one of the “eight immortals” of the ruling Communist Party.
The CDB is also mandated to lead China’s foray into Africa, as it seeks a foothold on the continent’s natural resources to fuel its voracious growth.
According to Bloomberg, the CDB’s lending to Africa now outstrips that of the World Bank. And the CADF is a cashed-up, private-equity style vehicle to further that investment in Africa.
For that reason, if the Discovery and Sundance projects have been deemed strategically suitable in the grander of scheme of things, it might just be a timing and pricing hurdles that need crossing.
But insiders also point out that while Cathay has had a long, successful track record with the CDB, Hanlong is a different prospect.
Casting aside the embarrassing insider trading scandal involving his employees in Australia, Hanlong head Liu Han is said to have solid backing from senior officials in Beijing. He is also known for literally dodging bullets, surviving an assassination attempt in 1997.
But while the cost of taking over Sundance is one thing, the future cost of building rail and port infrastructure at an estimated $4 billion is an entirely different proposition for CDB to consider, particularly with iron ore prices tipped to slide as the majors significantly ramp up production in the coming years.
The Sundance setbacks have not slowed Mr Liu’s tracks elsewhere. Hanlong is also the primary financier for a newly-announced $1.3 billion plan to blast the top off a hill called Mount Hope in Nevada, in search of a steel reinforcing ingredient molybdenum.