SHANGHAI/HONG KONG (Reuters) – China’s Baoshan Iron and Steel (Baosteel) will acquire its smaller debt-laden rival, Wuhan Iron and Steel, in a deal that will create the world’s second-largest steel producer as part of Beijing’s push to overhaul the stricken industry.

In a statement on Tuesday offering the first details of the long-anticipated deal, Wuhan said Baosteel will issue new shares to its shareholders to absorb the company. The proposal, which had previously been touted as a merger, is still subject to government approval.

A labourer shovels iron ore into a steel ladle at Wuhan Iron and Steel Group in the capital of central China’s Hubei province October 17, 2007. REUTERS/Stringer/File Photo.

Based on 2015 capacity, the two companies will produce about 60 million tonnes a year, leapfrogging Hebei Iron and Steel into the top spot among China’s steelmakers.

First announced in June, the plan to combine the two state-owned enterprises is part of the Chinese government’s push to consolidate its vast, fragmented steel industry to remove excess capacity.

How the final agreement looks may offer a blueprint for other similar proposals announced in recent months, including a merger of Anshan Steel and Benxi Steel.

“This is part of the government’s efforts to push through supply-side reform and will have a model effect for the new round of mergers and acquisitions,” said Hu Yanping, an analyst with industry website

Luxembourg-based ArcelorMittal SA is the world’s biggest steelmaker by capacity.

While China wants to boost efficiency in its steel industry, Baosteel faces the tough task of integrating its loss-making competitor.

“Baosteel is a profitable company and Wuhan is heavily indebted and just needs someone to save it,” said Richard Lu, an analyst at CRU consultancy in Beijing.

Moreover, the deal will not necessarily lead to capacity cuts since both Baosteel and Wuhan have built new plants and eliminated outdated, inefficient capacity in recent years, he added.

(Reporting by Ruby Lian and Manolo Serapio in SHANGHAI and Meg Shen and Twinnie Siu in HONG KONG; Writing by Josephine Mason; Editing by Christian Schmollinger and Clarence Fernandez)

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