Highlighting the growing global clout of companies from emerging markets, India’s Vedanta Resources Plc. reached a $2.6 billion (around Rs11,000 crore) deal to purchase the assets of a bankrupt US copper miner, Asarco Llc.
The deal would be one of the largest foreign purchases ever by an Indian company. The Mumbai-based metals conglomerate outbid three other groups, including Grupo Mexico SA, which first bought Asarco in 1999 but later lost control in a bankruptcy case. Grupo Mexico has said it will challenge the sale.
The sale would mark a turning point for the world’s mining giants, creating a showdown between a powerful Latin American group and an Asian rival for control over a historic US corporation.
Flush with cash after years of torrid economic growth and surging commodity prices, companies in developing economies are striking deals that would have been unheard of just a few years ago.
ASARCO’S TROUBLED PAST (PDF)
In many cases, these companies are snapping up established Western companies that have fallen on hard times. Often, the goal is to create a national champion that will eclipse competitors elsewhere in the world. As the US credit crunch slows deal-making in the developed world, emerging-market countries such as India and Brazil are taking a larger piece of the mergers and acquisitions (M&A) pie.
Emerging-market M&A activity so far in 2008 is up 17% over last year at this time, to $218 billion, while for the rest of the world it is down 43%, to $991 billion, according to Thomson Reuters.
South Africa’s MTN Group Ltd and India’s Reliance Communications Ltd are in talks to merge, potentially creating one of the world’s biggest cellphone firms. Brazilian miner Cia. Vale do Rio Doce earlier this year came close to a $90 billion purchase of Anglo-Swiss miner Xstrata Plc., before the talks broke down over price. In Russia, discussions are under way that could lead to a three-way tie-up between OAO Norilsk Nickel, OAO Metalloinvest and United Co. Rusal. Such a deal would create a Russian national metals and mining champion with a value of as much as $160 billion.
Indian firms have been particularly active. Tata Motors Ltd, part of the Tata group of companies, earlier this year agreed to purchase the Land Rover and Jaguar brands from Ford Motor Co. for $2.3 billion. Last year, Tata Steel Ltd bought the Anglo-Dutch steel company Corus Group Plc. for about $12 billion. The sale of Asarco, which will be part of an overall settlement of creditors’ claims against Asarco, remains subject to approval by the US bankruptcy court in Corpus Christi, Texas.
Though Vedanta shares are listed on the London Stock Exchange, the bulk of the company’s assets are in India. Chairman Anil Agarwal and his family control the company, whose share price has surged about 70% in the past year. The company had sales of $8.2 billion in the 12 months ended in March. Vedanta produces aluminium, copper, zinc and lead, with copper operations in India and smelting and refining operations in Zambia. The firm has generally shied away from acquisitions, but the few it has made—including the 2004 purchase of a majority stake in Zambia’s Konkola copper mines—have paid off quickly.
Mining firms are searching the world for new deposits at a time of rising prices. Acquisitions are a quick way to add to their stores. Indian companies are especially vying for a piece of the world’s minerals, as India’s economy grows. The country is already having trouble finding enough iron ore to fuel its busy steel mills.
The battle for control of Asarco began in 1999. That is when Grupo Mexico, a family-owned Mexican construction and mining conglomerate, surprised Wall Street by outmanoeuvring a US rival, Phelps Dodge Corp., to grab Asarco in a hostile takeover. Asarco was facing outstanding claims by federal and state governments involving environmental damage after a century of mining across the western US.
In the years after it bought the company, Grupo Mexico shifted Asarco’s profitable mining interests controlled by its US unit into the Mexican parent’s other corporate holdings. In 2005, Grupo Mexico placed Asarco in Chapter 11 bankruptcy.
Asarco’s court-appointed management sued the Mexican company, alleging that it stripped Asarco of assets to avoid paying the clean-up bill. That civil suit is currently being heard in a Texas court and could lead to damages of as much as $10 billion. Jorge Lazalde, vice-president and general counsel for Asarco Inc., the Grupo Mexico entity that is the nominal owner of Asarco Llc., denied the asset-stripping claim and said the suit is a legal tactic designed to damage Grupo Mexico.
Grupo Mexico contends the court-ordered auction for Asarco was flawed. The company insists it offered to pay Asarco creditors in full when initial bids were submitted in April and says that should trump any outsider’s attempt to buy Asarco’s assets. “The bottom line is we’re offering full payment, and they never even read our proposal,” said Lazalde. Asarco’s attorneys say Grupo Mexico can’t know the value of what “paid in full” will be until all environmental litigation is settled, which could take years. Today, Asarco runs refineries and mines in Texas and Arizona only. Former Asarco sites across the West have been the subject of disputes involving potential contamination.
Earlier this year, New Mexico challenged the reopening of an Asarco smelter in El Paso, Texas, near the New Mexico border. It was closed in 1999, but Asarco wanted to reactivate it due to high global prices for copper.
Robert Guy Matthews contributed to this story.