"Counterbid stumps Sterlite"

OUT OF THE BLUE: Grupo Mexico Makes $4.1-Bn Offer For US Co Asarco

TAKEOVER tussles appear to be the flavour of the season. After Essar found itself competing with a Russian firm for an overseas acquisition, it is the turn of Sterlite Industries to discover a rival bidder suddenly stepping out of the woodworks and challenging its takeover of Asarco — a $2.6-billion transaction that seemed a done deal.

On May 31, Sterlite announced the acquisition of Asarco, a US-based copper mining firm, in a cash deal after negotiating for several months. Much to it’s surprise, a few days ago, Grupo Mexico, the erstwhile promoter of Asarco, made an offer of $4.1 billion to regain control of the Tucson-based copper miner. Sources told ET that Grupo Mexico has submitted a proposal in the bankruptcy court in Corpus Christi in Texas to pay $ 4.1-billion to acquire Asarco. Significantly, the proposal has not been rejected.

In fact, the Asarco board would meet shortly to evaluate the offer, they said. On the face of it, Grupo Mexico’s $4.1-billion bid may seem to be far in excess of Sterlite’s $2.6 billion. But the offers from Sterlite and Grupo Mexico are not strictly comparable as the former does not include Asarco’s legacy liabilities, while the latter’s $4.1-billion bid does. But even after factoring these in, Grupo Mexico’s offer is higher than that of Sterlite’s. This transaction is a little more complicated than other M&A deals, since the transaction, done through an auction conducted by the Asarco board, was overseen by the bankruptcy court.

Grupo Mexico has also demanded that the break-up fee should not be paid to Sterlite, in case the deal fails through. The US government’s environmental protection agency, however, criticised the Grupo Mexico proposal, saying it would send wrong signals to investors.

The proceeds would help Asarco clean up its environmental mess and help protect its stakeholders from prolonged financial risks amid volatile copper prices.

GRUPO MEXICO
Mexico’s
largest mining corporation and the world’s third largest copper producer. It lost board control over Asarco when the latter filed for bankruptcy in 2005

$1.73b SALES
$452m NET PROFIT
$1.02b EBITDA
59% EBITDA MARGIN STERLITE

A leading
producer of copper in India. It is a part of Vedanta Resources, a London-listed metals and mining major with aluminum, copper & zinc operations in India

7332 SALES 1
932 NET PROFIT
367 PROFIT FROM COPPER
3535 REVENUE FROM COPPER Asarco bondholders oppose Sterlite

THE possibility of a re-bidding at this stage will depend on the bankruptcy court and the Asarco board. Grupo Mexico lost board control over Asarco when the latter filed for bankruptcy in 2005. It has submitted various proposals in the past three years, but this is for the first time it is coming out with a definitive financial plan to regain Asarco. “But now, it is announcing a new offer after the closure of the deal. One should keep in mind that Sterlite emerged as the highest bidder through a prolonged auction process,” said an industry expert.

Interestingly, Grupo Mexico is not the only party that’s opposing Sterlite. Two of the largest bondholders of Asarco — namely Harbinger Capital Partners Master Fund 1 and Harbinger Capital Partners Special Situations Fund LP — have urged the bankruptcy court in Texas to block the Sterlite deal. These funds said in a court document that Sterlite’s plan to finance the Asarco deal is “questionable” as it aims to raise most of the required fund from public market. Sterlite plans to create a subsidiary — Sterlite (USA) — which is expected to raise $780 million-$1.3 billion for the purchase. The funds said Asarco “ran an unfair auction and selected an illusory winner.” Asarco, formerly known as American Smelting and Refining Company, was put on the block after its creditors and trade unions filed for bankruptcy nearly a year ago.

Lehman Brothers acted as financial advisor and Baker Botts acted as legal advisor to Asarco in the auction conducted by the bankruptcy court. It is the third-largest copper producer in the US. Its bankruptcy in 2005 was caused by environmental liabilities.

Even as Sterlite tries to fend off its rival, another Indian group, Essar is in the midst of a full blown bidding war with the Russian mining firm Severstal for acquiring the US steel maker Esmark. Sections feel Essar is in an advantageous situation as the Esmark board rejected the Severstal offer. But, chances are the Russian company will return with a higher bid. Severstal is being supported by Esmark’s trade union and its largest shareholder. On the other hand, the Esmark board approved the Essar bid and also took a short term loan of $110 million from Essar.