This article first appeared in The Edge Financial Daily, on July 1, 2016.

KUALA LUMPUR: Tan Sri William Cheng will take a back seat in the business that earned him the moniker “Steel King of Malaysia” once an agreement with a strategic partner in China is finalised as part of an ongoing group-wide restructuring at Megasteel Sdn Bhd that still requires creditors’ buy-in.

“We’re looking at a 50:50 partnership, hopefully in two to three months [a deal] can be finalised,” Cheng, Lion Group’s largest shareholder replied when asked about the status of Megasteel’s proposed restructuring plan.

“We (Lion Group) will have a 50% stake but we will let them manage [the new enlarged steel business entity], and perhaps only deal with local sales and dealings with the [local] government,” Cheng added, but declined to name the partner as talks were still ongoing and an agreement had yet been sealed.

The intended Chinese partner is among the “top three ball bearing makers in China” that is able to contribute some RM2 billion worth of equipment to the partnership, according to a source familiar with the restructuring exercise.

China’s largest bearing manufacturers include Wafangdian (ZWZ), Luoyang (LYC), Harbin (HRB), Zhejiang Tianma (TMB), Wanxiang Qianchao, and C&U, according to data on the website of SKF, the world’s largest bearing maker that also has production plants in China. There is no official confirmation if the potential partner is among these players.

This is not the first time Lion Group is speaking to a Chinese partner and that a deal could well still fall through, but said negotiators and number crunchers are hard at work in China and back home. As far back as 2011, it was reported that Baosteel Group, China’s second-largest steel manufacturer, was considering a tie-up with Lion Group, but a deal had yet to materialise. 

Faced with industry-wide overcapacity and slower growth, Baosteel and smaller rival Wuhan Iron and Steel Group are said to be looking to merge in order to bolster their position and unseat market leader Hebei Iron and Steel Group, the South China Morning Post reported on Monday.

On May 23, The Edge weekly, citing court documents, reported that Lion Group’s insolvent flat steel maker Megasteel had proposed to build a new blast furnace — estimated to require some RM1.13 billion investment — as part of its corporate restructuring and debt settlement plan. The blast furnace is to help Megasteel’s hot-rolled coil (HRC) producing business viable by reducing production cost.

The documents made no apparent mention of a foreign party taking a stake in the restructured entity. There were also no details of the shareholding structure, specifically what Cheng’s or Lion Group’s equity stake would eventually be post restructuring.

Megasteel, which started business in 1999 as the only HRC producer in Malaysia with a RM3.2 billion integrated steel mill in Banting, Selangor, had racked up RM2.43 billion in accumulated losses as at Dec 31 last year. This was despite the benefit of a 25% import duty the government imposed on HRC, a rate which was raised to 50% in 2002. Megasteel has thus far gone through four debt restructurings, the latest of which was in 2014, when it only had consent from two of its seven US dollar term loan creditors.

As at Dec 31 last year, Megasteel — which is 21% held by Lion Diversified Bhd, and the rest by Lion Corp and Cheng’s Limpahjaya — owed RM895.7 million to secured creditors, while unsecured creditors and suppliers were owed RM3.28 billion.

In the court papers on the proposed restructuring, Cheng admitted that Megasteel’s business is not viable in its current state without government protection. It remains to be seen if a white knight will finally give closure to the long-drawn restructuring.