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Stillwater transaction to test Trump team’s appetite for China deals

10th April 2017

By: Bloomberg

  

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WASHINGTON – Even as President Donald Trump and President Xi Jinping of China met for the first time to try to sort out their complex relationship, Trump’s administration is reviewing attempts by China to buy sensitive US companies and in one case is actively trying to thwart a deal.

The Trump administration is scrambling to make sure Westinghouse Electric’s nuclear business doesn’t fall into Chinese hands. It also has national security concerns about several other deals in the pipeline that involve Chinese investors.

Bids for Lattice Semiconductor and money-transfer company MoneyGram International are potentially problematic because they could give China access to sensitive US technology and financial infrastructure. The US, which is reviewing both deals, can block foreign acquisitions of American companies on national security grounds.

The most pressing government review, however, is of a deal for Stillwater Mining, which operates mines in Montana. Stillwater is the sole US source of platinum and palladium, materials that have strategic importance and military applications. Its proposed acquirer, Sibanye Gold, is a South African gold miner whose biggest shareholder is a consortium with ties to China’s government.

At least one analyst said this week that those three deals weren’t as thorny as a possible sale of Westinghouse and said he was cautiously optimistic that they would win approval. Height Securities analyst Nils Tracy went on to say that the Sibanye deal had the fewest complications because palladium has a “low military priority".

Stillwater sells most of its output to a European refiner, which in turn sells to various companies, including US manufacturers.

UNFILLED POSTS
But some lawyers who work on foreign acquisitions are less sanguine about the prospects for those deals. The multi-agency panel reviewing them – called the Committee on Foreign Investment in the US, or CFIUS – has a backlog of takeovers to review and is adrift as senior posts at key member agencies have yet to be filled by the president.

Backlogs mean that many of the reviews won’t be completed on schedule. The panel’s deadline for the Stillwater takeover is approaching, on April 14, and may have to be extended. Even if the panel isn’t inclined to recommend blocking deals, repeated delays can upend them.

“The process is continuing as expected and we hope to have some feedback by the end of next week,” Sibanye spokesman James Wellsted said by phone. “We’re fairly confident it will be positive.”

Trump met with Xi at his Mar-a-Lago estate in Palm Beach, Florida, this week after having pounded the Chinese for taking jobs and stealing intellectual property from the U.S. The president’s harsh criticism of China has led some analysts to believe that Washington will take a tougher stance on foreign ownership of critical infrastructure and military suppliers.

Commerce Secretary Wilbur Ross said the administration has been looking carefully at the status of Westinghouse, although the company wasn’t discussed with Chinese officials during Xi’s visit, he said. Treasury Secretary Steven Mnuchin said any sale to a Chinese buyer would be reviewed by CFIUS.

“An undercurrent to Trump’s ‘America First’ agenda is preventing China’s ascent to world leadership status on par with the US,” Beacon Policy Advisors, a Washington policy research firm, said in a note in February. “In practice, this will mean that Trump’s administration is likely to reject a wide range of deals that would place US companies under the control of Chinese entities or funds.”

NUCLEAR BUSINESS
Already, the Trump administration is worried enough that Chinese investors may try to buy the Westinghouse nuclear reactor business that it’s trying to arrange a sale to a US or allied company, people familiar with the matter have said. Westinghouse, a unit of Toshiba, filed for bankruptcy protection last week. Chinese entities have been interested in the company for years, and the company has been a repeated target of Chinese attempts to steal nuclear know-how.

One person familiar with CFIUS deliberations said that the staff has been looking more closely at the ownership structures of potential Chinese buyers to ensure they fully understand the often complex entities that are involved.

Sibanye’s largest single shareholder is Gold One, a Chinese consortium that holds about a 20% stake and is owned by State-controlled companies including China Development Bank, as well as private investors, according to a document provided by Sibanye.

Representatives for Gold One and China Development Bank didn’t immediately respond to requests for comment.

Sibanye is offering $2.2-billion for Littleton, Colorado-based Stillwater, the biggest producer of platinum and palladium outside South Africa and Russia. The metals are identified as " strategic materials" by the US Defense Logistics Agency. Platinum is used for aircraft turbine blades and other parts, while palladium is used by aerospace and automotive industries. Some lawyers with CFIUS experience say possible concerns could be addressed by ensuring US access to the metals.

SECRETIVE BODY
Whether such concessions can satisfy the security panel might signal where US officials are drawing the line on Chinese ownership. Such clues are closely watched by deal-makers because CFIUS is a secretive body that provides no information about its deliberations. It doesn’t comment on reviews, even to confirm whether they are pending, or explain its actions. CFIUS can impose changes to deals to protect national security, like walling off American operations from foreigners, and can recommend to the president that a deal be blocked.

“Some major deals now in the pipeline should provide some insight on whether the committee will be taking a tougher stance,” said Shawn Cooley, a lawyer at Freshfields Bruckhaus Deringer LLP in Washington who previously worked on CFIUS reviews at the Department of Homeland Security.

The direction of CFIUS in the new Trump administration isn’t yet clear. The panel is led by the Treasury Department. Day-to-day operations are being handled by Aimen Mir, the deputy assistant secretary for investment security and a career Treasury official. Two senior positions at Treasury that are involved in CFIUS reviews have yet to be filled on a permanent basis.

The Trump administration has tapped Jim Donovan to be deputy secretary, the No. 2 position, and Heath Tarbert to be assistant secretary for international markets and development. The Treasury declined to comment on CFIUS’s work.

AWAITING APPOINTEES
Other departments with seats on the panel are experiencing similar problems. For any deal to be approved by CFIUS, a Senate-confirmed official from each lead agency must sign off. In practice, that means the cabinet secretary, a person familiar with the process said, because deputy and assistant secretary positions have yet to be filled with political appointments. That can delay reviews because it takes additional time and resources to move a recommendation to the top of a department, the person said.

Mir is overseeing a record number of deals. This year the panel is on track to review about 250 transactions, up from roughly 170 last year, according to people familiar with the figures, which haven’t been made public.

“The volume of transactions is way up, the complexity of the cases has increased, and there are Chinese cases that are taking more time to dissect and understand,” said Anne Salladin, a lawyer at Stroock & Stroock & Lavan LLP in Washington who works on cross-border deals.

Among the takeovers now awaiting approval is for Lattice Semiconductor, which has agreed to be sold to Canyon Bridge Capital Partners, a firm backed by Chinese investors. Lattice said in a securities filing in March that the deal was resubmitted to CFIUS after the 75-day review period expired without a decision. Lattice said the companies remain “fully committed” to the deal and were “actively engaged” with CFIUS.

MoneyGram is working to complete its sale to Ant Financial Services Group, which was spun out from the Chinese online retailing giant Alibaba Group Holding. The tie-up would allow Ant Financial to expand in the US by acquiring one of the country’s largest money-transfer service providers. In March, a rival, Euronet Worldwide Inc., offered a higher price for MoneyGram and wrote to Mnuchin to say the Ant Financial deal raises “significant” national security risks.

Canyon Bridge and Ant Financial didn’t immediately respond to requests for comment. MoneyGram said in a statement that under the proposed sale, Ant Financial won’t have access to US customer data and that MoneyGram will remain subject to examinations and audits by US regulators. It said it was on track to complete the deal in the second half.

Edited by Bloomberg

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