Baoshan Iron and Steel Co Ltd (Baosteel), China's No. 1 steel maker, announced Thursday that it is going to issue 5 billion shares to raise cash worth 28 billion yuan (US$3.4 billion) to buy assets from its parent Shanghai Baoshan Iron and Steel Group Corp.

(Photo source: China Daily)

The merger will more than double the assets of Shanghai-listed Baosteel, and make the company the world's eighth biggest steel producer.

The move will also pave the way for a listing of the entire state-owned parent firm, newly-crowned among the world's top 500 multinationals.

Through the acquisition, Baosteel will control assets from many of its parent's affiliates, including the majority of steel-making capacity not owned by the listed firm previously; and non-core assets - software and trading businesses, real property and a chemical company.

The parent's iron ore joint operations with Brazil's Companhia Vale do Rio Doce and Rio Tinto of Australia are also part of the merger package.

Rating agency Standard & Poor's said yesterday that its issuer rating on Baosteel would not be affected by the company's acquisition deal with its parent "as the proposed transaction represents a straightforward transfer of assets within the wider Baosteel group."

Standard & Poor's takes a consolidated approach in assessing the credit profiles of both companies.

"Although Baosteel is expected to assume some debt from the entities that it plans to acquire, the company's leverage is not expected to increase greatly, as the additional debt should be more than offset by the planned issues of new equity," Standard & Poor's said.

At most 50 percent of the 5 billion shares to be issued by Baosteel will be sold to the public, and the rest - which will be non-tradable - will be sold to its parent firm, Baosteel said.

The share issue plan will be put up for approval at a meeting of Baosteel shareholders, scheduled for September 27, and by Chinese regulators.

Qu Li, an analyst with China Securities Co, said that the merger deal was likely to make Baosteel the world's most valuable steel company.

"The merger will benefit Baosteel a lot as those businesses it will take over from the parent are expected to be very profitable within three years because of the bullish market," Qu told China Daily.

Baosteel now is only behind Japan's JFE Holdings and Nippon Steel, POSCO of South Korea and French Arcelor, with a market value of over US$10 billion.

Baosteel's earnings per share during the first half of this year stood at 0.38 yuan (US$0.046), up 28 percent from a year earlier, according to its half-year results.

Its net profit grew by 26 percent year-on-year to 4.79 billion yuan (US$578.5 million).

Trading in Baosteel shares was halted on Tuesday ahead of the announcement yesterday and is to resume today.

The enlarged Baosteel is forecast to reap 13.5 billion yuan (US$1.63 billion) in net profit, with turnover totalling 130.5 billion yuan (US$15.76 billion) this year.

The company expects to produce 16.5 million tons of crude steel this year, up from 11.2 million tons last year.

Baosteel revealed in April that it aims to increase annual production to more than 30 million tons and control 30 percent of China's steel plate market by 2009.

Company Chairman Xie Qihua said that Baosteel would even contemplate production of 50 million tons annually.

Its expansion appears to defy the governmental curbs on the nation's steel sector's overheated investment and excessive production capacity.

"Baosteel's rapid growth is in line with the steel sector's restructuring as it is focusing on high-end products which are in short supply in the domestic market. The government curbs are mainly put on redundant low-level capacity," said Qi Xiangdong, an official from the China Iron and Steel Association.

The association predicted that domestic steel output and demand this year would rise by 16.9 and 13 percent to 260 million and 280 million tons this year respectively from last year.

China has been the world's largest steel producing nation since 1993.

Xie said Baosteel was also aiming to float stocks in overseas markets.

"We have not abandoned plans to go public abroad. We still have that objective," Xie said Thursday in Beijing.

But she declined to offer a timetable or other details for overseas listing.

Baosteel initially hoped to go public abroad in 2000, but it failed and turned to the domestic stock market because overseas stock markets were not considering steel stocks highly then.

(China Daily August 13, 2004)