Talk of Southern Steel Bhd being a takeover target is not exactly new. Last year, murmurs of a merger between Ann Joo Resources Bhd and Southern Steel Bhd were heard, but remained unsubstantiated.

Recently, after a strong run in the share prices of both companies, talk of a merger heightened. Ann Joo has gained 55 sen or 19.6% since early this year, hitting its 52-week high of RM3.35 on Jan 14. It closed at RM3.18 last Friday after slipping 14 sen. Southern Steel’s shares hit a 52-week high of RM2.36 on Friday, before tapering off to end trading at RM2.24. Southern Steel’s stock has strengthened about 13% since early this year.

And now, with the proposed privatisation of Hume Industries (M) Bhd by controlling shareholder Tan Sri Quek Leng Chan, rumours of a possible merger of Ann Joo and Southern Steel have gained strength. According to Southern Steel’s annual report for FY2008, Hume Industries has a stake of 41.5% in Southern Steel, while Quek owns 43.2% directly and indirectly through Hume, a manufacturer of steel billets, bars and wire rods.

In a phone conversation, Ann Joo managing director Datuk Lim Hong Thye denied that Ann Joo has been in negotiations with Southern Steel. “The run in the share prices is sector-wide and not specific to both companies alone… we have not been in any negotiations to buy them (Southern Steel) over. The privatisation of Hume is an internal matter for Tan Sri Quek... nothing to do with us,” he said.

Synergistically, Ann Joo would be the ideal candidate to take over Southern Steel as both companies have their plants in Prai, Penang. However, with Lim re-iterating that Ann Joo has no such plans, it would be futile to speculate further. 

Nevertheless, if Southern Steel is indeed up for sale, who could the buyers be? 

Southern Steel’s market capitalisation last Friday stood at about RM939.5 million, meaning that any party looking to take over would need deep pockets as the offer price would likely have to be at a premium, easily nudging the bid past the RM1 billion mark. 

As at end-September this year, Southern Steel had net assets of RM1.68 per share.

For the nine months ended September, the company posted a net loss of RM43.5 million on RM1.4 billion in revenue. In the same period a year ago, Southern Steel raked in some RM364.5 million in net profits from RM2.7 billion in sales. The bulk of the losses in FY2009 were incurred in the first two financial quarters, with the economic crisis adversely impacting Southern Steel.

But things are on the mend now with a better economic outlook forecast, which could be appealing for any prospective buyer.

Interestingly, Southern Steel’s shareholders include NatSteel Holdings Pte Ltd, which owns about 27%.

NatSteel is a Singapore-based company, but is a unit of Indian conglomerate Tata Group. Among the units under the Tata group is Tata Steel Ltd, formerly known as Tata Iron and Steel Co Ltd or Tisco. 

According to reports, Tata Steel is the world’s fifth largest steel company, with a capacity to produce about 70 million tonnes of steel a year, and it is the largest private sector steel company in India in terms of domestic production.

In 2007, Tata Steel gobbled up Anglo Dutch Corus (formed after British Steel merged with the Dutch steel producer Koninklijke Hoogovens in 1999), and it is no secret that Tata Steel has set a target of 100 million-tonne capacity by 2015.

Suitors from China cannot be discounted as well, with the Chinese government spending in excess of US$586 billion (RM1.9 trillion) on stimulus packages to ramp up the Chinese economy.

China’s imports of iron ore (the raw component for steel making) have been strengthening, and gained 80% in December last year.

An analyst from a local bank-backed brokerage firm highlights that ties between Chinese steel players and their Malaysian counterparts have been improving, with Chinese steel companies playing an increasingly prominent role locally.

For instance, pipe maker Hiap Teck Venture Bhd has sought the assistance of China’s Jinan Iron & Steel Group Corp to build a steel slab plant in Kemaman. This came about after Hiap Teck acquired 55% of Eastern Steel from Datuk Law Tien Seng, Lau Chin An and Lee Ching Kion for RM110 million.

Ann Joo, meanwhile, had in 2008 awarded a US$57.8 million contract to Tangshan Iron & Steel Design & Research Institute Co Ltd in Beijing for the design, installation, construction, and commissioning of a blast furnace complex next to its existing plant in Penang.

“I wouldn’t be surprised if a Chinese company comes into Southern Steel with the liberalisation of the steel industry last year, and I wouldn’t be surprised if Southern Steel ends up in Chinese hands,” the analyst says.

He adds that only a handful of local players have the clout to take over Southern Steel.

He cites companies under the Lion Group banner which control the likes of Megasteel Sdn Bhd, as well as Kinsteel Bhd and its unit Perwaja Holdings Bhd, as potential acquirers as well.

But the Lion group is stretched financially since it formed a joint venture with Vietnam Shipbuilding Industry Group to build a US$9.8 billion plant in Ninh Thuan province, Vietnam.

Steel industry on an up-trend
Most analysts view the sector positively as it is buoyed by the recovery in the global economies. In Asia, other than China which has an incessant appetite for iron ore, demand for steel in Vietnam, for example, is projected to grow by 10% in 2010 in view of its infrastructure and property projects.

AmResearch, in a report on Ann Joo last Friday, added that there is progress on some major infrastructure projects in Singapore, which are well into the piling stage, including the Marina Coastal Expressway, extension of the Mass Rapid Transit (MRT) lines as well as Port of Singapore Authority (PSA) expansion works.

“Roll-out of major infrastructure projects should accentuate demand for construction-grade steel, triggering a multi-year re-rating for the steel sector,” AmResearch says.

This is excluding RM56 billion worth of jobs slated to be awarded locally, such as the RM7 billion Light Rail Transit extension that should be awarded in the next two months, while contractors for the Ampang line should be made known in 2Q2009.

AmResearch adds, “Taken in totality, we gather that a total of US$102 billion has been allocated under various stimulus packages announced by the leading members of Asean — Malaysia, Indonesia, Singapore, Thailand and the Philippines.”

With the outlook for the iron and steel industry looking rosier, it is likely that Southern Steel could get a suitor soon, leaving Quek with an exit strategy, and putting the speculation to rest.

This article appeared in Corporate page, The Edge Malaysia, Issue 789, Jan 18-24, 2010