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Russian steel and mining giant Evraz Group SA has agreed
Russian steel and mining giant Evraz Group SA has agreed to buy 51% of Chinese steelmaker Delong Holdings.

If Chinese regulators approve the deal, Evraz will become the first Russian steel company in the Chinese market.

Delong Holdings manufactures and sells hot-rolled steel coils and trades in steel products, mineral ores and related materials. The group operates in China, Singapore, South Korea, Vietnam and Indonesia.

Evraz Group is one of the world's largest vertically integrated steel and mining businesses. In 2007, it produced 16.3 million metric tons of crude steel.

On February 18 Evraz announced a multi-stage deal to buy shares from Best Decade holdings, the largest Beneficiary of Delong. It will first buy a 10% stake in Delong, another 32% in the next six months, and finally the remaining 9%, thus accumulating a controlling stake for a total cost of $762 million.

Having established itself as majority shareholder, it will then make a mandatory cash offer for the rest of the company. If all of Delong's minority shareholders accept, the Russian company's spending could increase to as much as $1.5 billion.

Evraz, whose shareholders include Chelsea owner Roman Abramovich, is currently on an energetic expansion campaign, buying up steel and mining assets in the CIS, Africa and the United States. With the acquisition of Delong, which annually produces about 3 million metric tons of steel, it will gain a firm foothold in China, which accounts for 30% of global steel output and is the fastest growing market in the world.

Last year steel production in China increased by more than 16%, to 490 million metric tons. Domestic demand is expected to rise 40% in the next three years.

"Investment in the Chinese steel sector, our first in the Asian Pacific region, is a crucial strategic move to expand our global foothold," said Alexander Frolov, Evraz chairman and CEO.

To convince their Chinese partner to accept the deal, Evraz has offered more than 30% above market price for its shares.

The good price, however, is not enough to explain the Chinese company's agreement to sell. China does not willingly grant foreign firms access to its steel market.

One theory is that Evraz, which is currently turning out more raw steel than it needs to produce rolled steel, could help satisfy China's voracious demand.

One way or another, Evraz has been given a ticket to the Chinese market. Although it paid a very high price, the game is clearly worth the candle.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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