October 23, 2012 3:46 am

Chinese bid for Discovery turns hostile

Cathay Fortune, the private equity group founded by Chinese billionaire Yong Yu, has taken a A$830m ($856m) takeover offer for Discovery Metals, the Botswana copper and silver miner, direct to shareholders.

In a statement, Mr Yu said the decision of Discovery’s board to refuse access to due diligence on “any reasonable basis” had left the company and its partner, the China-Africa Development Fund, with no choice but to launch a hostile takeover bid.

Cathay’s decision to take the deal hostile is extremely unusual for a Chinese company, which have largely shunned hostile takeovers in the past for fear of political backlash. One exception was Sinosteel’s 2009 takeover of Midwest, an Australian-based iron ore producer, which was the first-ever successful Chinese hostile acquisition.

Discovery, which is listed in Australia, this month knocked back an A$1.70 a share cash offer from Cathay, describing it as “inadequate”.

This drew an angry response from Mr Yu, the largest shareholder in Cathay, who said the Shanghai-based company was “extremely” disappointed by the lack of “engagement”.

Cathay owns a 13.7 per cent stake in Discovery, whose flagship asset is the Boseto project in the Kalahari copper belt in Botswana.

Mr Yu said the fact Cathay’s fully financed offer was pitched at a 40 per cent premium to the level of Discovery’s recent A$50m equity fundraising was reason enough for the board to engage.

“Our offer represents compelling and certain value at an attractive premium, at a time when there is significant uncertainty over the current and expected cash costs and mine expansion plans of the Boseto Copper Project,” Mr Yu said.

Shares in Discovery rose 4.9 per cent to A$1.73 on hopes of a raised offer or counter bid.

Discovery advised shareholders to take no action on the offer, which it said failed to reflect the value of its operations, expansion plans or the scarcity value of the company.

J-François Bertincourt, analyst at Canaccord Genuity in Sydney, said a rival offer from a mid-cap miner with a bullish view on copper or another Chinese company was a possibility.

“Discovery Metals is an excellent target. It fits all the desirable criteria: a quality asset with a long mine life, in a politically stable country and construction risk effectively extinguished”, he said.

The hostile move for Discovery underscores how Chinese companies have grown bolder and more mature in how they approach overseas deals, according to analysts. “As Chinese companies become more sophisticated in the international M&A arena they will be open to more adventurous, risky moves such as a hostile takeover,” said Bee Chun Boo, partner at law firm Baker & McKenzie in Beijing.

David Olsson, partner at law firm King & Wood Mallesons in Beijing, says that more hostile deals could be part of what he calls the “second wave” of Chinese offshore investment.

Whereas the “first wave” of overseas investment was more state-directed, the second is more commercially driven, in his view. “If it makes sense commercially and it is important enough it is possible we will see more hostile takeovers”, Mr Olsson said. But he added that these would still comprise only a small portion of the deals.

China is the world’s biggest consumer of copper, used in items such as household appliances and air conditioners, and Beijing has encouraged Chinese resources companies to expand their presence overseas to gain access to raw materials.

The offer is being financed by a term loan from China Development Bank and requires approval from the Ministry of Commerce and the State Administration of Foreign Exchange. Cathay says it expects to receive these approvals by the middle of next month

Cathay is being advised by Citigroup, while UBS is representing Discovery.

Additional reporting by Leslie Hook in Beijing