Indian investors don’t seem to like global takeovers. When Tata Motors announced its intention of bidding for Land Rover and Jaguar, its shares were beaten down. When Bharti Airtel disclosed that it was in talks with MTN of South Africa, its stock met with a similar fate. Yet, when Sterlite Industries, a leading copper producer in India, announced earlier this month that it had agreed to buy U.S.-based smelting, mining and refining company Asarco for $2.6 billion at a bankruptcy court auction, the company’s shares rose 2.83% on the otherwise subdued Bombay Stock Exchange (BSE).
It’s not investor fickleness, though. Jaguar, for instance, came with a carload of problems. What Asarco brought was a copper smelter in Arizona, a copper refinery, rod and coke plant and a precious metals plant, both in Texas. The more valuable prize: three open-pit copper mines, also in Arizona. “Asarco is the third largest copper producer in the U.S.,” says Enam Securities metals analyst Jagdishwar Toppo. “The company produced 235,000 tons of copper and reported an EBITDA (earnings before interest, tax, depreciation and amortization) of $640 million and a profit after tax (PAT) of $350 million in 2007. The acquisition, which is subject to approval from the bankruptcy court, is expected to be completed within the next six to seven months. Sterlite is insulated from all of Asarco’s environmental and legal liabilities.”
“As far as the environmental liability is concerned, we have fenced it,” Sterlite chairman Anil Agarwal told business channel CNBC TV18. (Asarco had filed for protection under Chapter 11 of the U.S. Bankruptcy Code on August 9, 2005, following massive asbestos-related litigation.) Adds Toppo: “Asarco has estimated reserves of five million tons of contained copper, which translates into 28 years of copper production at current capacity. The acquisition will further strengthen Sterlite’s non-ferrous metals portfolio.”
Not a Done Deal
Sterlite, however, faces a formidable challenger in Grupo Mexico, Asarco’s former owner, which is fighting hard to regain control. Grupo Mexico vice president Jorge Lazalde told Reuters earlier this month that his company will do “absolutely everything necessary” to block Asarco’s sale to Sterlite. “We will not stop until we get back what is ours,” he was quoted as saying. His company reportedly claimed that it was denied access to important information that would have allowed it to value Asarco accurately.
Vedanta Resources, the holding company and Sterlite’s parent, could face further challenges to its bid, as a federal bankruptcy court judge last week seemed willing to entertain offers from Grupo Mexico. Asarco’s current management has preferred to support Sterlite’s offer, which could involve a sale of assets to finance the latter’s acquisition. Grupo Mexico, however, has offered to pay off existing creditors and avoid a fire sale of assets, and has argued that such sales would not fetch fair market prices.
The federal bankruptcy judge asked Asarco’s management to file a Chapter 11 reorganization plan by July 1, although the company sought time until August 1. That plan could include a possible sale of Asarco’s assets to Sterlite, according to media reports. After Asarco files its reorganization plan, other bidders could enter the fray, including Grupo Mexico, which has bid $2.7 billion — $100 million more than Sterlite, the reports added.
Agarwal, who is also chairman of the London-listed $1.9 billion Vedanta Resources, explains the rationale behind the takeover. “There will be cross-border technology transfer because (Asarco had) assets in Australia,” he says. “We have assets in Africa and in India. It will be a great position for us.”
Navin Agarwal, deputy chairman of Vedanta and Anil Agarwal’s brother, is also upbeat. “This is the largest M&A transaction from India in 2008, and the largest M&A transaction ever done in this country’s history in the U.S.,” he told a post-takeover conference call of equity analysts. “This transaction gives us a geographical spread. We are, as you aware, primarily based in India with substantial operations in Africa and some operations in Australia. This gives us a geographical spread in the very mature U.S. markets.”
Take a closer look at Vedanta to find what this new generation of takeovers is all about. Although it is technically a U.K.-based company, it has Indian roots — much like Lakshmi Mittal’s ArcelorMittal, the world’s largest steel manufacturer. These industrialists find doing business from London easier because, despite substantial reforms, there is still lots of red tape in India.
Vedanta is essentially a metals player with interests in copper, aluminum and zinc. Apart from Asarco, its copper assets are a smelting business in India (which needs imported feedstock), two copper mines in Australia which it bought before its 2003 London listing, and the Konkola Copper Mines in Zambia acquired in November 2004. In zinc and aluminum, its assets are almost entirely in India. It has some minor interests in gold. In 2007, it acquired India’s largest private sector iron ore company, Sesa Goa. With this acquisition, Vedanta’s revenue breakdown (for 2006) was 55% copper, 21% zinc, 11% aluminum, 10% iron ore and 3% others.
It’s the copper business that merits a closer look. India’s copper consumption is just 2.5% of total world consumption and it is highly dependent on imports. With its takeovers in Australia, Zambia and now the U.S., all of them involving captive copper mines, Vedanta is ensuring that it has control over raw materials.
This is the story with many other companies, as India and China lead the race to corral natural resources. They are different in this respect from Brazil and Russia in the BRIC quartet of fast-growing economies. India and China are far older civilizations with much larger populations and, in terms of natural resources, they have no low-hanging fruits left. Their best option is to look abroad for acquisitions.
In 2007, Hindalco, an Aditya Birla Group company, took over Novelis, the world’s leading producer of aluminum rolled products, for $6 billion. Canada-based Novelis, which was spun off from Alcan, has a footprint in North and South America, Europe and Asia. As Kumar Mangalam Birla, chairman of the Aditya Birla Group, said at the time of the acquisition, “Novelis is a landmark transaction for Hindalco and our group. It is in line with our long-term strategies of expanding our global presence across our various businesses and is consistent with our vision of taking India to the world.”
The Hindalco footprint covers Australia too. In 2003, the company acquired two copper mines through its subsidiary Birla Mineral Resources. Later renamed Aditya Birla Minerals, this was the first Indian company to list on the Australian Securities Exchange (ASX) when it did an initial public offering (IPO) in May 2006.
Another Indian company listed on the ASX is Gujarat NRE Minerals, a subsidiary of Gujarat NRE Coke, the largest non-captive manufacturer of low ash metallurgical coke in India. The Australian subsidiary had its IPO in May-June 2007. It controls the NRE No 1 Colliery (formerly Bellambi West Colliery) at Russell Vale, 10 km north of Wollongong. The name NRE No 1 was chosen on purpose; Gujarat NRE soon acquired another coalfield in the southern coalfields of New South Wales. On April 28 this year, it opened a third mine — NRE Wongawilli Colliery. In addition, the group is prospecting for petroleum in the Canning Basin and for gold, iron ore, coal, magnetite and other base metals in the Tasmanian region.
Group vice-chairman Arun Kumar Jagatramka explained the quest Down Under at the time of the opening of the first colliery. “This mine will ensure Gujarat NRE is self-sufficient in raw material on a long-term basis,” he said. “We believe that in a volatile raw material environment, business stability can only be achieved through backward and forward integration.”
Passage to Latin America
In addition to Australia, Latin America has attracted other Indian companies as a destination for buying companies. ONGC Videsh (OVL — the overseas arm of the public sector Oil & Natural Gas Corp.) has picked up a 40% interest in the San Cristabel block in Venezuela for $450 million. The country’s largest company by market capitalization — Reliance Industries — has stakes in two other blocks. “During the past year, OVL has ventured into two new countries — Turkmenistan and Congo Brazzaville, and secured equity participation in 11 oil and gas projects in six countries,” says Silobreaker, an online search service for news and current events. “Reliance Industries is present in three exploration blocks in Yemen, two each in Oman and Columbia, and one each in East Timor and Australia. Besides, Reliance has also signed a technical evaluation agreement with ANH (Columbia’s hydrocarbon regulator) and has entered into a cooperation agreement with Ecopetrol (the national oil company of Columbia) for exploring opportunities in that country.”
“As strategic commodities like oil and other mineral resources are often owned and controlled by governments, MNCs have little choice but to partner with the government in target countries and acquire stakes through equity investments or by providing much needed technology as has been the case in Russia,” says Gurneeta Vasudeva Singh, a professor of strategic management and organization at the Carlson School of Management at the University of Minnesota. “International diversification of oil resources, for example, will play an important role for the energy security of any country, because increased reliance on the Middle East has its own detrimental effects.”
Oil, of course, is at the top of the agenda, especially in an era of rapidly rising prices. But other natural resources are also in demand. In June 2006, Jindal Steel & Power was granted the mining rights for 20 billion tons of iron ore reserves from El Mutun iron ore mines in Bolivia. This is one of the largest iron ore reserves in the world. In India, Jindal operates the world’s largest coal-based sponge iron plant. It also has captive coal and iron ore mines.
“Chinese and Indian FDI (foreign direct investment) in the region has been growing steadily since the mid-1990s,” says a World Bank study titled, Latin America and the Caribbean’s Response to the Growth of China and India. Its conclusion: “China and India’s growth is creating new production possibilities for Latin American economies, in particular for sectors that rely on natural resources and scientific knowledge.”
Latin America is, in a manner of speaking, the other end of the world. It’s when you look at Africa that the Indian and Chinese involvement begins to look like a laundry list. An April conference in New Delhi on Indo-African ties was attended by 14 top leaders and business delegates from 35 African countries. Deals worth some $17 billion were announced. Nigeria and Niger spoke about oil. Zimbabwe offered access to its uranium deposits. Coal was commonplace.
Both China and India need natural resources, but the quest can be perceived negatively. China has been labeled “The New Colonialist.” In an article with that title, The Economist writes: “There is no exaggerating China’s hunger for commodities. The country accounts for about a fifth of the world’s population, yet it gobbles up more than half of the world’s pork, half of its cement, a third of its steel and over a quarter of its aluminum. It is spending 35 times as much on imports of soybeans and crude oil as it did in 1999, and 23 times as much importing copper — indeed, China has swallowed over four-fifths of the increase in the world’s copper supply since 2000… What is more, China is getting ever hungrier.”
India, too, is getting hungrier — but its leaders claim the country is more enlightened. “The first principle of India’s involvement in Africa is unlike that of China,” union minister of state for commerce Jairam Ramesh told the New Delhi summit. “China says go out and exploit the natural resources. Our strategy is to add value.”
Whatever the strategy, the fact of the new gold rush cannot be denied. “There is an increasing trend among large Indian manufacturing companies in sectors like steel, paper, power, fertilizer and chemicals to acquire natural resources bases abroad, primarily in developing countries in Asia, Africa, the CIS (Commonwealth of Independent States) and Latin America,” says a recent paper by the Export-Import Bank of India. “Indian companies look for acquiring ferrous and non-ferrous mines, coalfields, forest acreage, phosphate mines, etc., to ensure regular and assured supply of raw materials at reasonable prices for their operations in India.”
Natural Born Drillers
The pace is hectic. Consider just one African country — Mozambique — and one natural resource — coal. Tata Steel and ArcelorMittal are spreading their wings. In August last year, Tata Steel picked up a 35% stake in the Mozambique Coal Project owned by Riversdale Mining of Australia. The coal is destined for Corus’s European units and Tata plants in India. In November, ArcelorMittal picked up a similar 35% stake in Rio Minjova Mining & Exploration. Global Steel Holdings, the Indian rump of the Mittal group left when Lakshmi Mittal broke away, has won a five-year prospecting license from the Mozambique government, and Orissa-based mining company P.K. Ores has announced that it is targeting coalmines in that country.
In December, five public sector organizations — Steel Authority, Rashtriya Ispat Nigam, Coal India, National Minerals Development and National Thermal Power — set up a special purpose vehicle called Coal Ventures International (CVIL) to pick up equity in coal projects abroad. Mozambique is high on its radar screen; CVIL has already completed due diligence on two blocks on offer. (CVIL is also looking at acquisitions in Australia, Canada, the U.S., Indonesia, Zimbabwe and South Africa.) Another public sector company, Bharat Earth Movers (BEML), has set up a joint venture with Midwest Granite and Sumber Mitra Jaya of Indonesia. In May, the venture acquired its first mine in Mozambique. The coal will be marketed in India.
This display of public sector initiative has come with encouragement from the Indian government. On June 3, the Reserve Bank of India (RBI) gave a further boost to Indian companies investing in natural resources abroad. According to a RBI notification: “…it has been decided, in consultation with the union government, to allow Indian companies to invest in excess of 400% of their net worth … in the energy and natural resources sectors such as oil, gas, coal and mineral ores.” The limit was earlier 200%, and there were other conditions.
In Africa, the Western media has already started a campaign against the two emerging Asian giants. It rankles that African countries prefer Asia. “Given the history of colonization, I don’t know how welcome the western companies can be,” says J. Ramachandran, BOC chair professor of business policy at the Indian Institute of Management, Bangalore (IIMB). “I suspect that is one reason why Western companies have stepped back.”
“Investments in Africa will lead to greater competition between Indian and Chinese firms, but also present opportunities to work together and better understand each other’s capabilities and weaknesses,” says Singh of the University of Minnesota. “This can present both a huge opportunity and threat. Western companies and interests have always existed in Africa given its vast natural resources — but social and political instability has slowed progress in making greater investments.”
Ramachandran disagrees with the view that Asian countries are involved in the “new exploitation of Africa.” “When Indian companies buy firms overseas, why should it be viewed as colonization?” he asks. “This is a Western notion, like Bush saying that the world is facing a food shortage because Indians are eating more. An Indian company acquiring overseas firms to secure raw materials is very much a workable proposition. It is no different from a multinational setting up a software development facility in Bangalore. In one case, it is human capital; in the other case, it is physical raw material. Raw material is a finite quantity — so whoever has preemptive access to raw material will be able to add value and sell downstream. If you want to go down the value-added path. you must have access to the basic raw material.”
As a strategy, investing in natural resources abroad has a lot going for it. Yet there are dangers. According to Ramachandran of IIMB, “The risk element, especially in Africa, is that the potential of nationalization by the government is very high. Though it is a phenomenon of the past, the risk is always there.”
Although Sterlite’s proposed takeover of Asarco is not part of the new colonizers debate, it does form part of the broader race by emerging economies to secure sources of commodities and raw materials in order to expand their own operations. That race will continue regardless of whether Sterlite eventually clinches the deal and takes over Asarco, or whether Grupo Mexico regains control.
Last week, Sterlite’s parent, Vedanta Resources, began making its arrangements to pay for Asarco. Vedanta is now in the market to sell about $2 billion in bonds, and plans to use those funds, in part, to finance its Asarco bid and refinance debt, according to a Reuters report. The coming weeks — and a bankruptcy court — will determine whether or not some of that money finds its way to Arizona.