Vedanta sets sights on Anglo’s zinc business

 Vedanta Resources promoter Anil Agarwal was just a scrap trader in Mumbai at the age of 20. Nearly four decades later, he is taking on Anglo-Swiss mining giant Xstrata and China Metallurgical to buy Anglo American’s zinc business. 

The London-based metals producer has set his sights on the nearly $1-billion assets to establish his lead as the world’s biggest manufacturer of zinc when the demand for the metal is soaring in India, where most of his business interest lies. 

Hindustan Zinc, which Mr Agarwal bought from the government in 2002 for Rs 445 crore, is bidding for the zinc businesses of South African resources company Anglo American. Anglo, once a target for takeover for Xstrata, is selling assets and cutting jobs to reduce debt and increase revenues from copper and iron ore. 

“Hindustan Zinc’s move will give it access to technology and economies of scale in trading and distribution of the metal,” said Shamik Bose executive director, commodity, currency & interest rate futures markets at Microsec Commerze. “Since zinc consumption is growing in India, most of the metal is likely to come into India. It is also in line with the Vedanta Group’s policy to secure raw material supplies, be it from Konkola Copper Mines in Zambia or mines in Australia.” 

The demand for zinc in India is estimated to grow as much as 15%, compared with the global average of 5% . Steel industry consumes 70% of the zinc produced here. With the automobiles sale forecast to jump this fiscal, the demand for the metal may also rise. 

What’s at stake is Anglo American’s Skorpion Zinc in southern Namibia, which produces 150,000 tonne of zinc a year. Also, the Lisheen Mine — the largest producer of zinc concentrates in Europe in Ireland — and mines in South Africa. 

Mr Agarwal is no stranger to acquisitions. He has won some and lost some, and battling some more. But this one could be different given his enhanced financial strength and experience. 

His climb to the top of the resources heap in India was more through acquisitions than greenfield projects, which includes the buyout of Mitsui’s stake in iron ore miner Sesa Goa. “Their M&A team’s hunger is stronger than others,” said Navin Vora, a partner at Ernst & Young that has worked with Vedanta on many deals. 

The biggest boon for him was when the government sold strategic stakes in Bharat Aluminium, or Balco, and Hindustan Zinc. He managed to buy both the companies which were inefficiently run, but possessed enormous resources. These acquisitions propelled him to the top of the chart and seek a listing on the London Stock Exchange, the first ever for an Indian company. Mr Agarwal was not fluent in English when he landed in Mumbai, but now, top investment bankers such as John Mack of Morgan Stanley, discuss opportunities with him. 

Hindustan Zinc’s net profit rose to Rs 2,802 crore in the nine months to December 2009, from Rs 68 crore in 2002. Its sales rose to Rs 5,518 crore during the same period, from Rs 1,470 crore. Unlike the past acquisitions, Mr Agarwal is now rich with cash, which some of the rivals for Anglo American’s assets such as Xstrata may not find easy to match. He is also audacious when it comes to bidding. 

In 2001, he bid Rs 550 crore for half of Balco with just about Rs 25 crore in hand. He won the competition against Australia’s Rio Tinto, BHP Billiton and Russia’s Rusal. His bid was double that of the second bidder and many thought it was a blunder. But his guts proved to be right. So was the case with Hindustan Zinc whose share price was Rs 36.65 on the Bombay Stock Exchange on April 1, 2002, the time of stake sale. But, it is now at Rs 1,239. 

“HZL’s healthy cash reserves could work to its advantage in this bid,” said Reena Walia Nair, base metals analyst at Angel Broking. “If it is aggressive and wants to really clinch the deal, it has the funds to back its bid.” HZL is a zero debt company and has reserves of Rs 10,700 crore. Its smelter capacity is at 8.8 lakh tonne and is followed by Xstrata, with a capacity of around 7.3 lakh tonne. 

But this deal could be more difficult given that zinc is at around $2,400 per tonne, up more than 50% in the last 18 months. Others may also bid high. Mr Agarwal, who’s building a university for a billion dollars, has shown the tenacity to fight for what he wants even if he ends up losing a bid. 

The most audacious was an unsolicited offer in the 1990s to buy out Alcan’s Indian unit, Indian Aluminium, which the parent company resisted. It was subsequently sold to Hindalco Industries. That was when the country did not have any meaningful takeover regulations. 

Sterlite Industries, a Vedanta subsidiary, is believed to have recently joined the biggest US labour union — United Steelworkers Union — to appeal against a court decision that led to it losing a $2-billion bid to buy the bankrupt US copper miner Asarco. Earlier, the company had raised its offer twice to match the higher global copper prices. Vedanta declined to comment on the bid for Anglo American’s zinc business and the Asarco bid. 

Mr Agarwal is also in a legal dispute with the government of India over the purchase of remaining 49% state stake in Balco. An arbitration is underway in London. “Mr Agarwal sees something more than us,” said a senior executive in a rival firm who lost the bid for Sesa Goa. 

Source:  Economic Times