The economic meltdown and fall in commodity prices will help Sterlite Industries, the flagship firm of London-listed Vedanta group, in closing the acquisition of US copper miner Asarco at a valuation that is nearly half the earlier agreed price of $2.6 billion, after discounting 'goodwill' and liabilities.
The deal is expected to be finalised in a week as the Asarco board has agreed to the offer price, sources close to the development said.
"Sterlite will pay at least $1 billion lower than the earlier decided $2.6 billion for the specific assets of the bankrupt Asarco. The $2.6 billion valuation had been finalised after considering the value of synergy and other intangible assets. In the current situation, when copper prices are down 60 per cent at $3,200 a tonne compared to the peak price in June 2008, the real value of assets is also lower along with the intangible assets," said sources.
Goodwill is an accounting term used to show the "intrinsic value" of a company beyond its assets, such as reputation the firm enjoyed with its clients. With the fall of the economy, the goodwill of the acquired firms also dropped, putting pressure on the acquirer’s balance sheet.
In May 2008, the Anil Agarwal-controlled Sterlite had emerged as the lead bidder with a $2.6 billion offer to buy Asarco's operating assets. But the current credit crisis and the sinking copper prices have forced the company to revise the offer. In October, the lawyers representing Asarco informed the bankruptcy court at Corpus Christi in Texas that the Indian company would not be able to close the $2.6 billion deal in this scenario.
"Sterlite is about to conclude its talks with the Asarco board, related to payment issues. Both parties are looking at various payment options, including part upfront payment and remaining staggered over a period of time. It will be finalised soon. The company is likely to make the part payment using the cash in its books," said sources.
Sterlite has about $7 billion cash and cash equivalents in its books. The exit of Grupo Mexico, the estranged parent of Asarco, from the race for the company also came in favour of Sterlite's revised offer. The Asarco board has no options remaining to save the sinking company.
The deal would allow Asarco, which owns three copper mines in Arizona, to exit bankruptcy after seeking court protection from creditors amid a slew of environmental lawsuits in 2005. It would give Sterlite, India's top non-ferrous metal producer, a total copper smelting capacity of 635,000 tonnes a year and proven copper reserves of 5 million tonnes. Sterlite had earlier proposed to double the capacity of Asarco, maintaining quality and environmental standards.
When Asarco filed for bankruptcy in 2005, the court and a creditors' committee assumed control of the firm.
Grupo Mexico had bough the firm in 1999. Labour disputes led to a four-month strike, which ended when Asarco filed for bankruptcy protection. Recovering from bankruptcy, Asarco had posted a profit of about $1.9 billion last year.