The 1990 classic Barbarians at the Gate tells the tale of RJR Nabisco CEO F. Ross Johnson and his ill-fated efforts to prevent his company being bought out by private equity maven Henry Kravis.
But if Johnson could have taken lessons from Du Shuanghua, he might not have been so easily outmanoeuvred. Despite finding himself in much tougher circumstances, the Rizhao Steel boss continues to fight a rearguard action against the acquisitive (and state-owned) Shandong Steel.
If you think you’ve heard some of this story before, you’re right. WiC first wrote about Du’s travails a couple of years ago, and Rizhao appeared to agree to be taken over in late 2008.
So how is it possible that nearly three years on, Du is still holding out? Rizhao’s sale was supposed to be another example of the ‘state advances, private sector retreats’ theme (see WiC30) that has characterised China’s business landscape in recent years. The idea was that a more consolidated steel sector would be able to demand better prices in iron ore negotiations, and that having fewer steel firms would also make it easier to curb pollution in the industry.
To most observers the deal looked unstoppable, as something that had been mandated from a senior level. Commercially, of course, it looked a harder sell (especially for Rizhao shareholders) to accept that it was in their interests for a loss-making state-owned company to take over a profit-making private one.
But instead of resisting outright, Du’s tactics have been to draw out negotiations, and bargain for a bigger payout.
Once the Shandong provincial government’s intentions became clear, Du sold a third of Rizhao’s core assets to a Hong Kong-listed company, Kai Yuan Holdings, that he’s rumoured to control. That poison pill tactic allowed him to slow the sale process, as Shandong needed to also gain control of the offshore vehicle – a situation that gave Du added leverage. The state-owned acquiror has since missed two of its own stated deadlines for completing the deal. “The two sides can’t agree on a valuation, and Shandong Steel can’t come up with the necessary funding [estimated at around $1.5 billion],” explains the Economic Observer, “so [they] have suspended restructuring negotiations.”
And Du isn’t finished yet. His latest tactic is to join forces with another state-owned firm, China Minmetals. Rizhao has reportedly undertaken to manage Minmetals’ loss-making sheet-steel manufacturer, Yingkou Medium Plate.
Here’s where things get complicated. The Yingkou deal’s primary purpose (it’s speculated) is to bring in another income stream that Du can potentially use as leverage for a bigger payout for Rizhao. Pushing up the price further could even see Shandong Steel lose interest, especially if the rumours are true on the problems funding the existing bid.
But why is Minmetals coming to the rescue, potentially to the detriment of a state-owned peer? Unlike provincially-run Shandong Steel, Minmetals is centrally-owned by Beijing, and has a separate agenda. Under Du, Rizhao made around $1.1 billion in profit last year, and Minmetals wants to tap that acumen to turnaround its wayward charge (Yingkou has been loss-making since 2008).
That has prompted the surprise Yingkou-Rizhao tie-up. “Regardless of Du’s motives,” argues CBN, “it’s completely unprecedented to see a private firm entrusted with the management of a company affiliated with the central government.”
In picking Minmetals, Du also has a partner that has expanded internationally and may be easier to work with than his primary suitor. Not that there are signs yet of Shandong Steel giving up; the battle has been a bitter one. Last year there was speculation that Du had been forbidden from leaving China, after he gave surprise testimony in the Rio Tinto corruption case, and the Economic Observer also points out that Rizhao failed an environmental audit last year, which some thought could have been partly politically-motivated. Still, while it lasts, Du’s case is a story of resistance to the supposedly dominant decree of the state. In Rizhao’s case, the private sector hasn’t retreated quite as rapidly as its state-owned purchaser would have liked…
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