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Baosteel Co.,Ltd Alert:Baosteel to merge with Wugang via share swap

发布时间:2016-09-23    研究机构:德意志银行

Baosteel to take over Wugang via 0.56:1 share swap.

On 22 September, Baosteel and Wuhan Iron & Steel (Wugang) announced adetailed plan of their merger. The merger will be completed via a share swap –Baosteel will issue new shares to Wugang’s shareholders to fully absorb thelatter company. Conversion prices have been set based on 90% of the averagemarket prices over the past 20 days – Baosteel at RMB4.60 and Wugang atRMB2.58, which implies a share swap ratio of 0.56:1. After the merger, thetotal number of Baosteel shares will increase from 16,467m to 22,119m. At theparent company level, Baosteel Group will merge with Wugang Group and berenamed Baowu Iron & Steel Group. Trading of the two stocks will continue tobe suspended while the SSE reviews the merger plan.

Financially not a great deal.

The share swap ratio is ROAE dilutive for Baosteel's shareholders. Baosteel'simplied PBx in the transaction is 0.67x, but Wugang's implied PBx is high at0.96x. However, Baosteel's average ROAE from 2010 to 2014 was 7.9% (weignore 2015 ROAE as it was an extreme year), whereas Wugang's averageROAE in those five years was only 3%. This means that the ROAE of the newcompany (after the merger) will be dragged about 10% lower than Baosteelused to deliver. Meanwhile, the new company's net debt will grow fromRMB54bn to RMB96bn, implying the net gearing for Baosteel growing from47% to c.68%. Without considering any material synergy, the deal doesn’tseem favorable to Baosteel shareholders.

Signals to the market mixed.

The market might be cheering for the synergy of the merger, including a highermarket share of high-end CRC and GOES, potential cost falls after the merger,and more centralized and efficient procurement and logistics, and so on.

However, the transaction might create market concerns about China SASAC'signorance towards minority shareholders' interests because this merger isdilutive to such a good quality asset as Baosteel. This might reduce investors'appetite to invest in China's top SOE assets as there could always beuncertainty about further dilutive mergers. All in all, we like the industryconsolidation and believe in Baosteel management’s capability to create thesynergy. All in all, we like the industry consolidation and believe in Baosteelmanagement’s capability to create the synergy. Provided Baosteel's valuationis still undemanding, we maintain our Buy rating even though we don't like thevaluation of this deal.