Macro Tsimmis

intelligently hedged investment

Sterlite Industries India Ltd. (SLT) update #4

Posted by intelledgement on Mon, 02 Jun 08

Wow. It was a busy weekend for Indian billionaire Anil Agarwal’s core company (and, in modest part, our’s) Sterlite Industries (SLT). On Saturday, Sterlite “signed a definitive agreement for the [purchase] of substantially all the operating assets of Asarco for $2.6 billion in cash. The agreement is subject to the approval of the U.S. Bankruptcy Court for the Southern District of Texas, Corpus Christi Division, and the sale will conclude Asarco’s Chapter 11 case,” according to the press release. Then on Sunday, Asarco’s current owner, Grupo Mexico (GMBXF, the conglomerate controlled by German Larrea Mota-Velasco), vowed to do “absolutely everything” in their power to block the sale.

If it goes through, the deal would make SLT the planet’s third-largest copper producer (displacing, not so incidentally, Grupo Mexico, who are currently #3). It would be the largest acquisition of a US company by an Indian company…except that technically, Sterlite is buying only Asarco’s assets, and not the company per se. “The asset acquisition is on a cash free and debt free basis. Sterlite will assume operating liabilities but not legacy liabilities for asbestos and environmental claims for ceased operations,” according to the press release. The assets in question include three open-pit copper mines and a copper smelter in Arizona, and a copper refinery, rod and cake plant, and precious metals plant in Texas. Asarco produced 235,000 tonnes of refined cooper last year and its mines have estimated reserves of 5MM tonnes of contained copper. Last year, sales were $1.9B.

Asarco was originally a Rockefeller company when formed in 1895, but was purchased by Grupo Mexico in 1999. In 2005, the company declared Chaper 11 bankruptcy in the face of billions in environmental and asbestos law suit claims. Grupo Mexico subsequently lost control of the board of directors, who are now appointed by the bankruptcy court. Again according to the Sterlite press release, the deal signed Saturday followed a “selection process in which Sterlite and several other entities participated over many months. Bidders submitted offers in late April and the selection of the highest and best bid occurred on Friday, 23 May 2008. The selection process carefully followed a procedure supported by Asarco’s creditors and approved by the U.S. Bankruptcy Court for the Southern District of Texas. An independent court-appointed examiner also closely observed the bidding process.”

On the face of it, this looks like a good deal for SLT. Most of the cash is potentially available from the ADR sale the company held in 2007, which raised $1.75B, so they probably won’t need to strain very hard to fund the balance of cash required. The objections from Grupo Mexico are de rigueur, but relations between Asarco and their erstwhile parent have been deteriorating steadily since 2005, with escalating charges and counter-charges…it is doubtful that GMBXF management seriously expect to wring much more blood out of the Asarco stone.

If this analysis is right, then we are getting a great asset base at a bargain price…and if we are wrong, then, this one could get interesting: the Agarwal family/conglomerate vs. the Larrea family/conglomerate. Should be fun to watch, either way.


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