Sterlite Industries (SIL) has agreed to buy troubled US copper miner Asarco for $1.7 billion.
The company on Saturday said it will pay $1.1 billion in cash and a promissory note for $600 million, payable over nine years, for the acquisition.
The deal consideration is way below the $2.6 billion SIL had offered Asarco in May last year, when copper prices were at the all-time high of over $8,000 per tonne. It later cancelled the offer citing falling copper prices (currently $3,685 per tonne).
On the face of it, this appears to be a good bargain.
But, coming as it does in times of severe financial and economic distress, will it really stand SIL in good stead?
“This acquisition is in line with our strategy of leveraging our existing skills to become a diversified global copper producer and creating long-term value for shareholders,” a company release quoted chairman Anil Agarwal as saying.
Analysts and industry experts too seem to believe the deal will be value-accretive for SIL in the long run.
For one, the acquisition pushes up Sterlite's smelting capacity by over 50 per cent to 637,000 tonnes.
Asarco has estimated reserves of 5 million tonnes of copper and sold 237,000 tonnes of refined copper in 2008.
Under the deal, Sterlite has acquired assets including three open-pit copper mines and associated mills, a copper smelter, and a copper refinery, rod and cake plants and a precious metals plant.
For 2008, Asarco reported revenues of $1.9 billion.
“Under the current scenario this is a good deal,” Rakesh Arora, an analyst at Macquarie Group said in a phone interview. “This will help Sterlite reduce costs and raise production.”
An analyst with a domestic brokerage also said that Asarco will be very beneficial for Sterlite in the long run. “It will be a cash cow in the next commodity up-cycle,” the analyst said, requesting anonymity.
Sterlite said it would be a debt-free acquisition.
“We will assume operating liabilities but not legacy liabilities for asbestos and environmental claims for ceased operations. The consideration being paid is towards the gross fixed assets and working capital of Asarco,” it said.
The agreement has other favourable clauses, too.
The promissory amount of $600 million includes a payment of $20 million per year from the end of the second year for seven years, and a terminal payment of $460 million at the end of the ninth year. However, if the annual average of daily copper prices in a particular year increases beyond $6,000 per tonne, the annual payment in 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 agreement is subject to the approval of the US Bankruptcy Court for the Southern District of Texas, Corpus Christi Division.
Tuscon, Arizona based Asarco had filed for bankruptcy in 2005 and faces $7.9 billion in claims, mainly from government agencies seeking payment for environmental cleanup and individuals claiming damages from the asbestos-based products of one of the company's units.
Tarun Jain, director (finance), SIL told DNA Money, “The deal would be complete by June-July subject to the court's approval.”
Under the terms of the agreement, Asarco can continue to hunt for higher offers until the approval comes.
Source: DNA India