Arcelor Mittal, which has agreed to buy 38.41% of China's Laiwu Steel, has accepted a paring of its stake to improve its chances of winning government approval, sources
familiar with the situation said on Friday.
They added, however, that Arcelor Mittal would have to raise the price significantly in order to clear regulatory hurdles, since the Chinese company's share price has risen sharply since the deal was originally struck.
In February 2006, before merging with Mittal to form the world's biggest steelmaker, Arcelor agreed to pay 2.085 billion yuan ($275.6 million) for the stake, or 5.888 yuan per share, a roughly 15 percent premium to Laiwu's net asset value.
The proposed deal gave Arcelor a stake equal to Laiwu Steel's state-run parent, which would also hold 38.41%.
But it failed to win regulatory approval.
"Arcelor Mittal has agreed in principle to scale back the stake by 0.5 percentage point to hand over control of Laiwu to its parent, to improve its chances for regulatory approval, just as Mittal did with Valin back in 2005," said one of the sources.
The source was referring to Mittal's reduction of its proposed stake in mid-sized Valin SteelTube & Wire to 36.7% from 37.17%, in deference to a new Chinese steel policy banning foreign control of the country's major steel mills.
Arcelor Mittal and Laiwu are now in a fresh round of talks to renegotiate the pricing of the deal, as Beijing released new rules on mergers and acquisitions of domestically listed companies in the middle of this year mandating that the pricing of any equity deal be based on the target firm's share price, rather than net asset value.
Based on Laiwu's share price of 16.39 yuan by midday on Friday, a 38.41% stake would be worth 5.8 billion yuan, nearly triple what Arcelor agreed to previously.
"Beijing has already set the rules clearly. Arcelor Mittal will accordingly have to come up with a lot more, or there could be no deal," another of the sources said.
Laiwu steel declined to comment.
Arcelor Mittal spokesman Jean Lasar declined to comment on whether the company had agreed to lower its stake or would increase the price, but said negotiations with Laiwu were continuing and his company remained committed to buying a stake in the Chinese steel mill.
"We hope to get it done as soon as possible," he said.
The Arcelor Mittal deal is among several high-profile cases involving foreign purchases of Chinese industrial firms that are on hold, amid worries by Chinese authorities that the country is ceding control of key assets to foreigners.
U.S. investment firm Carlyle has so far been thwarted in its attempt to buy into Xugong Group Construction Machinery, China's biggest construction machinery maker.
In October 2005, Carlyle agreed to buy 85% of Xugong for $375 million.
After Chinese officials balked at letting the U.S. company have such a big stake, Carlyle agreed last October to take only 50%, and cut this further to 45% in March.
Carlyle is still awaiting final word from Beijing.
Laiwu Steel, based in the eastern province of Shandong, is China's second-largest maker of H beams -- used heavily by the construction industry -- which made up roughly 30% of its 24.32 billion yuan in sales in 2006.
Its first-quarter net profit jumped more than six-fold to 220.87 million yuan on robust market demand.
Laiwu's A-shares, traded on the Shanghai Stock Exchange, fell 4.15% to 16.39 yuan by midday, underperforming a 1.61% drop in Shanghai's benchmark index. They have jumped 67% since February, in line with the market benchmark.