Third-party bid foils Asarco-Cyprus merger — Grupo Mexico offers to buy up Asarco shares

The bid by Asarco (AR-N) and Cyprus Amax Minerals (CYM-N) to create the world’s largest publicly traded copper company is being challenged not only by Phelps Dodge (PD-N), in the form of a higher bid, but by the arrival of a second suitor.

Mexican-listed Grupo Mexico entered the arena with an offer to buy all the shares of Asarco it does not already own for a cash tender of US$26 per share. The offer, which is good until Oct. 25, represents a premium of 41% over Asarco’s share price before the merger proposal was announced. The US$1-billion offer is also slightly higher than Phelps Dodge’s most recent bid of US$9 and 0.288 share of Phelps Dodge for each share of Asarco.

Phelps Dodge had hoped its new bid would kill the 2-way deal, in favour of the 3-way merger creating an even larger company capable of being the world’s top producer of the red metal. Recent anti-trust approval under the Hart-Scott-Rodino Act seemed to place the deal one step closer to a sure thing.

However, Grupo Mexico’s all-cash offer may appeal to Asarco shareholders, and could spell trouble for both merger proposals.

As a result, Asarco and Cyprus have amended their merger agreement to allow each company to explore its alternatives. However, should they terminate the merger, it will still be subject to breakup fees based on the market capitalization of the company quitting the deal. Cyprus, if it were to walk away, would have to pay US$45 million, or Asarco US$40 million.

Grupo Mexico is backing its cash offer with claims that it could achieve annual cost savings of at least US$100 million by 2001 from reduced administrative and overhead costs. The company boasts of a track record of significant cost savings. Its break-even cash costs for its operations were US71 cents per lb. in 1993, but these have since fallen as a result of pressure from low prices to US37 cents per lb. by the second quarter of 1999.

Grupo Mexico expects its break-even costs following the addition of Asarco would be US52 cents per lb. Mine production from the combined company would be 975,000 tonnes copper per year.

Grupo Mexico operates 13 mines and nine metallurgical plants across Mexico, including the Cananea and Caridad porphyry copper mines in Sonora state. The company originated as the Mexican mining division of American Smelting & Refining, the precursor to Asarco, 100 years ago. In 1965, Asarco sold 51% of its Mexican mining division to Mexican investors, forming Asarco Mexicana, which ultimately became Grupo Mexico. Asarco’s stake was diluted to 34% in 1974. The company further reduced its stake to 8.2% in 1997, valued at US$79 million. In turn, Grupo Mexico, one of the country’s largest mining companies, owns a 10% stake in Asarco.

For Grupo Mexico’s offer to be accepted, 80% of Asarco’s outstanding shares must be tendered in favour of the deal. Grupo Mexico must be satisfied that the Asarco-Cyprus merger has been terminated.

Asarco and Cyprus have postponed until Oct. 7 their special shareholders meeting, originally scheduled for Sept. 30, allowing time to assess the various offers. Phelps Dodge, in a letter to Asarco filed with the U.S. Securities and Exchange Commission, offered the company a chance to examine “a revised proposal superior to the ones you are now considering.”