It is hard to feel sorry for someone worth Rmb35 billion ($5.13 billion), but Du Shuanghua may be an exception. He’s being forced to sell his profitable steel business to a state-owned rival, in a deal the Sydney Morning Herald likens to a “daylight heist”.
His Rizhao Iron and Steel company – located on China’s east coast – is a target for Shandong Iron and Steel. The latter, which is owned by the Shandong provincial government, is proposing a price that equates to less than a third of Rizhao’s implied market capitalisation. This fact alone has led to testy negotiations, which have been ongoing since last November. They were supposed to be finalised this week (they weren’t).
Another unusual aspect to the deal: Rizhao is evidently the better run entity. It eked out a Rmb1.8 billion profit in the first half – a decent result in what is a troubled industry – while Shandong Iron and Steel made a Rmb1.8 billion loss.
The Shanghai Morning Post commented incredulously on the sitution: “We have never heard of a case where a loss-making firm takes over a successful company. Policymakers should remember that the miraculous performance of the Chinese economy in the last decade was driven by the private sector’s growth.”
In this case the ‘successful’ private sector company is being swallowed by the loss-making state-owned firm. Some worry this signals a disturbing trend whereby the state seeks to squeeze out the private sector, and reassert more control over key industrial sectors.
The government’s control over bank lending is one means to do this. The Beijing News points out that Shandong Steel has received Rmb240 billion of loans from state banks; and it is through this access to credit that it can finance its M&A plans. “Without its government ownership, which bank would lend so much money to an enterprise making such heavy losses?” opines the newspaper.
Du established Rizhao Steel in 2003, and it currently produces around 8 million tonnes of crude steel annually. It generates about a third of the city of Rizhao’s GDP too. Shandong Steel – with three times the output – wants to integrate Rizhao in an effort to become one of the world’s top steelmakers, on a par with foreign firms like South Korea’s Posco.
Du had tried a white knight strategy. According to China Daily he sought to sell a stake to a Hong Kong listed firm – which the Financial Times has alleged has connections with powerful figures in the central government. Du presumably hoped they would trump the Shandong government in influence. However, it doesn’t seem to have worked, perhaps because the central government is now so keen on consolidation in the steel industry (see this week’s Talking Point).
China Daily reports too that officials from a local environment agency recently ordered Rizhao to close down production on two of its boilers. And such tactics may escalate, Du’s executives worry, if they don’t cooperate with the local authorities and agree to a sale.
To a Western reader this may smack of a violation of basic property rights. Du probably wouldn’t disagree.
For the moment, the fate of his 67% stake in Rizhao hangs in the balance. But it looks like it will go to Shandong Steel at a big discount to its market value.
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