On August 21 China's famous multi-industry private sector corporation Fuxing Group (also known as Fosun) announced the signing of a cooperation agreement with state-owned Hainan Steel to set up a joint venture to engage in the iron ore mining and processing business. According to the new agreement, Fuxing Group will invest RMB 900 million ($118 million) and own 60 percent of all shares in the new joint venture, while Hainan Steel will invest RMB 600 million ($79 million) and claim a 40 percent stake.
Before this latest deal with Hainan Steel, Fuxing has made significant investments since 2000 to buy and restructure a number of domestic steel corporations, especially focusing on state-owned steel enterprises. Due to the booming steel market and effective management, Fuxing's investments achieved excellent returns. With profits in the targeted steel corporations improving remarkably, the total output of the steel mills under Fuxing's control is expected to reach 20 million tons by the end of 2007, thus drawing closer to the output of China's biggest steelmaker Baosteel.
So far, Fuxing owns 30 percent of shares in Jianlong Steel - a big domestic private steel corporation - and has controlling stakes in Nanjing Steel, Ningbo Hanggang Jianlong Steel and Hainan Steel. For its next M&A move, Fuxing is targeting Hangzhou Steel and Qingdao Steel whose annual outputs are both more than three million tons. Besides, Nanchang Steel and Jiangsu Tieben Steel also seem destined to be taken over by Fuxing soon. If everything goes according to plan, it is even possible that Fuxing may surpass Baosteel's total steel output in the near future.
Fuxing's mergers with state-owned steel mills have been supported by all levels of local government and by the managing staff of the targeted mills. Firstly, local government tax income from the steel mills in question has not declined. On the contrary, due to Fuxing's more effective management, taxes rose remarkably. Secondly, Fuxing hardly fired any of the targeted mills' management staff and even gave them shares in order to stimulate their enthusiasm and passion for work. Its M&A model has made Fuxing a popular investor with both local government and targeted corporations.
Fuxing's rapid growth is a remarkable phenomenon in the Chinese steel industry, and has attracted widespread attention. Current state policy is not fully clear on issue of the legality of mergers carried out by domestic private corporations with medium or large state-owned steel mills. Although the Chinese government would prefer the giant state-owned steelmakers to be the leading M&A actors in the industry - and this would certainly seem true when foreign steelmakers are presented as the alternatives, domestic private sector corporations may now be the second best option. However, the state's attitude towards Fuxing's rapid development seems on the cautious side for the time being.