BackAsarco bid now making sense
Asarco bid now making sense
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Existing investors are hardly ever comfortable with high equity dilution. Also, it’s unclear why the company’s fund-raising target is so high. At current valuations, a 25% dilution would fetch the company $2.35 billion (Rs11,233 crore).
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It already has a net cash position of about $900 million and its bid for copper giant Asarco Llc. will involve an initial cash outgo of $1.1 billion. The Asarco bid involves another payment of $600 million, but that’s spread over nine years and will come out of the cash flows of the acquired company. Although the company has capital expenditure plans, it’s internal cash accruals are strong.
Earlier this year, consensus estimates of the long-term value of copper were around $4,100 a tonne. They have now risen to around $4,400-4,500 a tonne, thanks to the sharp rise of about 40% in copper prices this year. Also, there were fears earlier in the year that copper prices could fall below Asarco’s cost of production of about $3,100 a tonne and this could burn some cash in the near term. These fears are now unfounded.
At current copper prices and based on analysts’ estimates of the long-term price of the metal, the acquisition is increasingly making sense. One concern, however, is that the WSJ report suggests that Sterlite also improves its terms of payment to asbestos claimants. The markets had taken comfort from the fact that the company will be ring-fenced from Asarco’s legacy liabilities, but now it needs to be seen what its revised bid has to offer to these claimants.
Of course, it’s still not clear if Sterlite will eventually win the bid for Asarco, as two other firms are in the fray. But the markets’ concerns about the acquisition have certainly eased, thanks to the sharp recovery in copper prices.
Write to us at marktomarket@livemint.com
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