Arrium steels for an M&A masterclass

Arrium has swiftly rejected a well-timed takeover offer, setting in motion what should be a fascinating battle between its shrewd chairman – aka 'Pacman' – and the covetous consortium.

Arrium Ltd’s rejection of an unsolicited takeover offer is predictable given the conditions that were imposed. But at the very least, it could get the ball rolling. And there’s no better man for the job than takeover veteran and Arrium chairman Peter Smedley – aka Pacman.

The proposal, tabled on Friday night, came from a consortium made up of Hong Kong commodities trader Noble Group, Korean steelmaker Posco, and three Korean funds – the National Pension Service of Korea, Korea Investment Corporation and Korea Finance Company.

Both Noble and Posco are undoubtedly aware of the benefits that would come with acquiring Arrium – especially for such a cheap price. The proposal on offer is for 75 cents per share, just 8 per cent higher than the stock’s average price over the past three months.

Posco is sure to be eyeing up Arrium’s steel distribution network in Australia, while Noble will likely have a keen interest in the group’s iron ore business. For Posco, Arrium’s Whyalla plant in South Australia would give it an advantage as the steelmaker looks to bulk up its Australian assets.

Arrium’s share price had also weakened of late on the back of concerns over iron ore. The share price hit an all-time low of 50 cents earlier this month, as fears grow that it may find it difficult to repay its $2 billion debt liability if iron ore prices remain at current levels. Arrium will be hoping that the iron ore price will climb back up to the $120 mark. But with slowing demand from China this is unlikely, in the near term at least.

So the consortium’s offer was well-timed. But the conditions attached, including exclusivity for six weeks to conduct due diligence, made it a much less attractive bid than it could have been.

Still, the share price soared today following the announcement. Just an hour after the market opened, the stock had risen 26 per cent to 69 cents, after closing at 54.5 cents on Friday. Although that is still significantly lower than the $1.37 it hit in April, and well below the high of $7.21 seen in mid-2008.

The move by Noble, Posco, et al, is clearly an attempt to take advantage of both depressed commodities prices and the steelmaker’s sunken share price. But even to the casual observer it’s obvious that the opportunistic timing of the proposal would not be viewed favourably by Arrium.

Still, it opens the door for negotiations, and shareholders will be buoyed to have Smedley on their side should there be any further offers.

Earning the mantle "Pacman” from his time at Colonial due to his aggressive attitude toward takeovers, Smedley is an industry veteran who knows the ins and outs of M&A activity.

His experience at Spotless is a great example of Smedley’s ability. Earlier this year, he helped negotiate a $2.71 per share deal in a drawn out takeover with Pacific Equity Partners.

PEP’s initial bid of $2.63 for Spotless last December was rejected outright by Smedley, who said that it undervalued the company. A keen believer in never accepting the first offer, Smedley is likely to have viewed Friday’s bid as just a base from which negotiations should begin.

The Spotless takeover may not have exactly gone to plan – Smedley and his board fought to bag an offer of $2.80 per share, but with mounting pressure conceded that an improved offer of $2.71 was enough. But at the very least, the experience showcases Smedley’s ability as a determined dealmaker. This is exactly what’s needed when dealing with heavyweights like Noble and Posco.

Noble, Posco, et al’s response will be the major factor that interested parties will be waiting for. A number of players will be waiting on the sidelines to see how events unfold, and we could soon see a bidding war for Arrium if the steelmaker plays its cards right.