The scheme of arrangement takeover proposal that Arrium, formerly known as OneSteel, fielded on Friday from the Korean steel-making giant, Posco, and the Hong Kong-based commodities trader Noble Group was easy to reject, but it is almost certainly only the first exchange.
Noble, Posco and the Korean investment funds that are also involved in the takeover attempt will surely return with an improved proposal. The one that Arrium chairman Peter Smedley said this morning had been rejected by the Australian group's board was too low and too conditional to get to first base.
BlueScope Steel's managing director Paul O'Malley will be watching very closely indeed. One of the jewels inside Arrium is an Australia-wide steel distribution network: Posco getting its hands on that network and using it distribute its own steel products here is a nightmare scenario for O'Malley.
Arrium chief executive Geoff Plummer and his board would have had no trouble dismissing the first approach, which was made jointly by Noble, Posco and three Korean funds — National Pension Service of Korea, Korea Investment Corporation, and Korea Finance Corporation.
The proposed offer price of 75 cents a share was low, even taking into account the fact that Arrium's shares were hammered in September as the iron ore price plunged.
It compared with a price for Arrium of 54.5 cents ahead of the announcement of the approach (the shares leapt by about 15 cents after the announcement to about 69.5 cents), but it was also only 8 per cent above the volume-weighted average price of Arrium's shares in the last three months.
The shares went as low as 50 cents in September as the iron ore price fell, but they have been as high as $1.39 in the past year. Broker price targets start at 87 cents a share, and a price of $1.53 is being targeted by the broking arm of Merrill Lynch, which through its investment banking division is advising the Posco-Noble consortium .
The offer was also made on condition that Noble and Posco satisfactorily complete exclusive due diligence that Arrium says the consortium estimated could take 6 weeks, a fairly lengthy period to demand exclusivity. It is conditional according to Arrium on the bidders "entering into satisfactory arrangements with Arrium's existing lenders in relation to the debt profile of Arrium post-acquisition."
About $2 billion of debt inside Arrium contains a change of control clause, which is usual, but bidders bidders usually cover themselves against the prospect of the debt being pulled after a change of control by arranging bridging finance ahead of the offer. Posco and Noble are heavyweights who can certainly handle the proposed acquisition, and the Korean funds in the consortium may also have a funding role, but the financing of the offer is unclear.
If the takeover terms are sweetened substantially and embraced by Arrium's board it could be a game changer in the steel industry here.
Noble is interested in Arrium's iron ore mining assets. The group is producing and shipping about 8 million tonnes a year through its Whyalla port - an asset that is also of interest, given that it is South Australia's only bulk export port. Arrium has previously announced plans to boost iron ore production to 12 million tonnes a year by the middle of next year.
For Posco, the steel business is the key. Its distribution network could underpin the arrival of Posco as a domestic competitor, changing the competitive environment for BlueScope significantly.
Posco is also probably interested in Arrium's mining consumable business, which supplies mining grinding machinery and other hardware that uses high quality steel products.