When Chinese investors sought to secure a supply of niobium metal, UBS had the unique challenge of coordinating five state-owned enterprises to a punishing timetable, all the while taking on board the differing needs of each enterprise.
It was the largest-ever cross-border acquisition by a Chinese consortium and, it seems, the largest metals and mining transaction between China and any other emerging market country. When five Chinese state-owned enterprises (SOEs) formed an unusual syndicate to pay $1.95bn for a strategic stake in the world’s largest niobium producer, it was UBS, as their sole financial advisor, that performed the formidable task of coordination. Though the bankers would never say so, it must have been like herding cats.
China is the largest single consumer of niobium and the consortium reflected a cross-section of Chinese demand. The group was led by Citic, the banking and investment group, which has a significant metals trading operation. Its other members were Baosteel, Anshan Iron & Steel and Shougang – three large steelmakers – and Taiyuan Iron & Steel, which specialises in stainless steel.
As such, all are deeply interested in the future supply patterns of niobium, a rare, soft grey metal used in a variety of steel alloys. It adds strength and toughness, has very high resistance to heat and superconducting properties, and is in increasing demand in a wide range of industries.
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Niobium finds its way into gas pipelines, jet and rocket engines, and the superconducting magnets of MRI scanners. It also ends up in a growing number of car parts and construction materials, and may even have a future as a catalyst in the conversion of palm oil to bio-diesel. Either way, overall growth in demand is expected to be higher than that of crude steel production itself.
Superalloy demand
That growth is likely to accelerate as emerging economies become more sophisticated. “We are already seeing an upward trend in the intensity of use of niobium in Asia,” says James Teo, UBS head of metals and mining investment banking for China. “As the economies of countries such as China develop, demand for superalloys is growing.”
If the world wants more niobium, there are not too many places to find it. Africa, Australia and Russia have known deposits, but almost all present-day production comes out of Brazil and Canada. The largest producer by far is Brazil’s Companhia Brasileira de Metalurgia e Mineração (CBMM), which accounts for 80% of global production. With its Araxá mine in the state of Minas Gerais, CBMM is owned by the Moreira Salles family, which is perhaps better known as part-owners of Brazil’s biggest private-sector bank, Itaú Unibanco.
The motives on both sides of the CBMM transaction were very similar, believes Stephen Gore, Hong Kong-based UBS head of mergers and acquisitions (M&A), and corporate finance for Asia-Pacific. “In an industry where supply and demand are concentrated, it is in the interest of both buyers and sellers to bond together in the tightest fashion,” he says.
China strength
UBS has been sparkling in the Asia-Pacific region of late, most notably in equity capital markets and M&A, and China has been its strong suit. This particular deal was some time in the making, although the buyers were obliged to move with some speed in the closing stages.
“We had a dialogue with Citic in particular over a period of years, in the context of the market dynamics around niobium and how to secure supply for the Chinese steel industry,” says Mr Gore. China consumes about 30% of the world’s niobium, and the Citic consortium accounts for a substantial portion of China’s steel production and hence niobium demand.
But the Chinese consortium was not the only one seeking to do a deal with CBMM, which was also in talks with a group from Japan and South Korea. This consortium comprised from Japan steelmakers JFE and Nippon Steel, trading company Sojitz and Japan Oil, Gas & Metals National Corp (Jogmec); and from South Korea steelmaker Posco and the National Pension Service.
Nonetheless, these two separate negotiations were not mutually exclusive. The Moreira Salles family, advised by Deutsche Bank, was determined to sell a 15% stake to each group, leaving 70% in its own hands. “The decision was taken to do the deals in series, rather than in parallel,” says Mr Gore.
Doing the deal
The Japanese-Korean acquisition of a 15% stake for $1.95bn was announced in April and then it was the turn of the Chinese to sit down and hammer out a deal. The size of the stake and the price would be the same, but the transactions would not be identical.
“The fact that there was a template for the transaction made our task easier in some ways, but in some ways more difficult,” says Mr Gore. “Any deal represents a very hard-fought compromise of positions on both sides. We now knew what their hard fought compromise positions were, but maybe some were not what the Chinese were prepared to accept.”
Each of the SOEs has its own technical department and they were each asking different questions about the asset – on matters such as reserves, grade, capacity, processing and costs. We then had to coordinate the queries and responses
Then began the drawn-out process of negotiating amendments, concluding financing and securing approvals at all levels within all five SOEs – including daily conference calls with all five. And, of course, each of the five had its own way of doing things and its own internal benchmarks.
“In addition to the financial due-diligence process, technical diligence had to be carried out, with the help of a technical advisor,” says Mr Teo. “Each of the SOEs has its own technical department and they were each asking different questions about the asset – on matters such as reserves, grade, capacity, processing and costs. We then had to coordinate the queries and responses.”
Tight deadline
There was one added pressure, which was that the seller had imposed a tight timetable, insisting that the deal be closed by the beginning of September 2011. But it would not be enough for the SOEs to have merely signed a contract by then, they also had to get the whole business endorsed by China's National Development and Reform Commission.
As the agency that manages the Chinese economy, the commission insists on approving any outbound acquisitions by SOEs, putting them at a natural disadvantage to other bidders in most asset auctions. That was not a problem in this case, but it certainly added to the time pressures, as pre-approval is not an option.
Chinese regulatory requirements accounted for a number of the amendments to the original Japanese-Korean transaction. Finance for the Chinese deal was structured differently – payment in cash, financed by a central facility provided by an unnamed but 'significant' Chinese bank.
“Some drafting in the earlier document needed to be clarified or amended, and there were certain items specific to certain counterparties that needed to be re-opened,” says Mr Gore. “The most intense part of the deal was getting to the point of signing.”
That point was finally reached in June, leaving only a couple of months to secure regulatory approval. As the approval process can take more than three months, this was not ideal. “But we got through it relatively quickly, and managed to keep the entire transaction confidential while the process was going on,” says Mr Gore. “Given that there were five separate members of the consortium, that was an unusual achievement.”
Approval was granted just as the deadline closed in, bringing to an end a process that had lasted more than two years. Clearly, the Chinese authorities favour the idea of SOEs banding together to compete for scarce or sought-after resources, this may be the first of many such deals. For its part, UBS has acquired useful experience in coordinating the demands of SOE consortia, and added to its tally of large Asian metals and mining deals – its fourth this year.
