FOREIGN TRADE: by Ian H. McDougallNews Weekly
Australian shareholders suspicious of China's motives
, March 20, 2010
Any investor loves a takeover battle. Institutional shareholders, representing the "big end of town", frequently accumulate large stakes in takeover targets and want to make top dollars from their investments. Often, they are not even Australian - the notorious international hedge funds just take their money and run, as they did before the taxman could grab any of the proceeds from the recent float of the Myer department store chain. Their money has no nationality. The highest bid will always win.
But smaller shareholders are different. These retail shareholders, or "mums and dads" in stockbrokers' lingo, are important when a takeover target has a wide shareholder-base, as when Wesfarmers purchased Coles. Winning their hearts and minds can be vital to swinging a deal. Money is important, but small stockholders often feel a sense of personal responsibility for "their" company.Ravenous
When it comes to takeovers today, the big story is China. China has bought $13.8 billion worth of Australian assets since the start of 2009, mostly in mining, to feed the ravenous appetite of its power plants and blast furnaces for raw materials.
One might think most Australian shareholders would be satisfied with this trend, looking at the big gains in share prices on offer. But they are not.
According to a recent report: "The majority of Australian shareholders are opposed to Chinese investment in local companies, and fear that foreign owners would take control of resources and manipulate commodity prices." (Australian Financial Review
, February 22, 2010).
A poll of 1,600 retail shareholders, conducted by the Melbourne Institute and Global Proxy Solicitation in February this year, found that over half of shareholders surveyed were against Chinese interests buying stakes in Australian companies. Another 40 per cent of respondents agreed with allowing Chinese investment in Australia, while about 10 per cent were unsure.
The perception among Australia's mums and dads is that the Chinese Government and companies are taking over Australia's resources and manipulating prices; Australian investors don't benefit; and Chinese investment doesn't create jobs.
Says Maria Leftakis, managing director of Global Proxy Solicitation: "The key reasons for investors who think that China shouldn't be allowed to invest in Australia are probably emotive reasons against foreign ownership, or foreign government ownership, of Australian companies."
Let's look at the record. Are these concerns "emotive" or soundly based?
From the point of view of shareholders, the Chinese are low-ball buyers; they are bargain-hunters. The Chinese bought coal-producer Felix Resources for $3.5 billion, and China's Minmetals "rescued" Oz Minerals, despite the Federal Government excising, for security reasons, an Oz Minerals mine that bordered the Woomera rocket range.
Chinese steel-maker Hunan Valin bought a strategic stake in emerging Western Australian iron ore miner Fortescue Metals. These bids were at the bottom of the market, when it looked as if the economy of the whole Western world might collapse. Serious major bids have more or less dried up now that the Australian economy is out of danger.
What about Rio Tinto? The Anglo-Australian miner was near collapse following an ill-judged foray into aluminium. China's state-owned aluminum producer Chinalco offered to "rescue" Rio in an ill-fated deal that would have inevitably led to the Chinese state controlling the world's second biggest mining company at a bargain price.
Then came the farce of China's bid for agricultural chemical-maker Nufarm. After months of negotiations and due diligence, the Chinese company suddenly dropped the price it would pay for Nufarm shares at the last minute, evidently feeling it had the Australian company over a barrel. A Japanese company came to the rescue in a deal that satisfied both parties.
The "bid" for CSR's sugar division by China's Bright Foods, a transaction that would have had a profound influence on Queensland's sugar farmers, amounted to little more that a couple of faxes. Are retail shareholders' reactions to these botched deals and evident bad faith "emotive"? Or are they showing a sounder perception of unethical Chinese commercial practices than is the big end of town, which can see only millions of dollars in advisory fees?China's ethics?
As for China's commercial ethics, they will be on display when Rio Tinto's Stern Hu, an Australian citizen, goes on trial in Shanghai shortly. Hu's "crime" is commercial espionage - he was too smart for China's factionalised iron ore buyers. Hu and three other members of Rio Tinto's iron ore sales team have been in detention in Shanghai since July 7, 2009. The truth is that thousands of dollars can change hands over a single iron ore shipment when supplies are tight or if, for some reason, the cargo is re-priced.
China's human rights record, evidence of a Communist regime that will go to any lengths to hold onto power, does not require retelling here.
All the evidence is that China drives a very hard bargain and will pounce when an opportunity presents itself, and then won't let go at any price.
Perhaps Australia's mums and dads are closer to the truth than the big end of town would like to admit.