Indian miner Sterlite Industries and its London-based parent Vedanta Resources announced on Friday a new deal to acquire substantially all the operating assets of Arizona-headquartered Asarco for $1.7 billion, down from $2.6 billion agreed in May 2008.
The consideration is split into $1.1 billion of cash plus a senior secured, non-interest bearing promissory note of $600 million. On behalf of Sterlite, ABN AMRO has issued two letters of credit totalling $100 million to secure the sale agreement and will issue an additional $25 million letter of credit on receipt of certain bankruptcy court approvals.
The note is back-ended, payable over nine years and its principal amount will be adjusted post-closing based on Asarco's working capital position. It has been uniquely structured to build in fluctuations in copper prices, and presumably the difference in opinion between the buyer and the seller on copper price forecasts. Sterlite will pay $20 million per year from the end of the second year for a period of seven years; and a terminal payment of $460 million at the end of the ninth year. In case the annual average daily copper price in a particular year increases beyond $6,000 per tonne, the annual payment for that year will be proportionately increased subject to a maximum of $66.67 million and the terminal payment in the ninth year will be correspondingly reduced, keeping the total payment at $600 million. The note is secured against the assets being acquired and is non-recourse to Sterlite.
Asarco is an integrated copper mining, smelting and refining company with around 2,500 employees, and currently is the third largest copper producer in the United States. It was earlier the American Smelting and Refining Company, and has a 110-year-long operating history.
Sterlite is buying three copper mines, associated mills and plants in Arizona; a copper smelter in Arizona; and a copper refinery, rod and cake plants and precious metals plant in Texas.
Sterlite Industries is an Indian non-ferrous metals and mining company with interests in aluminium, copper, zinc and lead. It is a part of metals and mining group Vedanta Resources.
Sterlite was advised on the deal by RBS Securities, a part of the Royal Bank of Scotland Group, with legal advice from Shearman & Sterling. Barclays Capital, who presumably inherited this mandate as part of its takeover of Lehman Brothers' North American operations, acted as financial advisor to Asarco and Baker Botts as legal advisor.
The deal has been ongoing for almost a year. In May 2008 Sterlite announced it had entered an agreement to buy Asarco for $2.6 billion in cash in a closed auction, run in compliance with US bankruptcy rules as Asarco filed for bankruptcy under Chapter 11 in 2005 as a result of asbestos-related liabilities.
But even at that time Grupo Mexico, Asarco's largest shareholder, was not a party to the takeover by Sterlite. Grupo Mexico, which mines gold, silver, copper, zinc and molybdenum, bought Asarco for $2.5 billion in 1999. It lost control of the business following the bankruptcy.
In October 2008 Asarco terminated its agreement with Sterlite when Sterlite said it would not proceed with the deal unless Asarco agreed to a price reduction from the $2.6 billion earlier agreed, citing changes in copper prices.
Grupo Mexico had been waiting in the wings with a $2.7 billion bid which it tabled. But Grupo Mexico was forced to subsequently withdraw its bid citing falling copper prices and the current market conditions, enabling Sterlite to re-enter the fray and drive a hard deal, reduced significantly from its earlier offer.
But some analysts are still questioning whether future copper prices justify Sterlite's decision to shell out such a large sum for Asarco. Sterlite's decision to proceed may have been encouraged by the cash pile that Vedanta is sitting on. In June 2008 Vedanta closed a $1.25 billion dual-tranche global bond, timing its deal well to catch the tailwind of a commodity price boom. The deal was the largest ever high-yield bond for an Asian corporate borrower. With access to that cash, plus the $600 million back-ended repayment bond that it has negotiated, Sterlite's financing risk on the deal is significantly lowered.
