MMX Mineracao & Metalicos SA, the miner controlled by Brazil’s richest man Eike Batista, said it’s not interested in a deal with Ferrous Resources Ltd. after the closely held iron-ore producer proposed a takeover.
Ferrous, backed by billionaire Philip Falcone’s Harbinger Capital Partners LLC hedge fund in New York, proposed on Dec. 19 a $2.3 billion takeover of MMX, according to a letter about the plan obtained by Bloomberg News. The companies held “several discussions” on a merger over the past 18 months, according to the letter, to which a response was requested by Jan. 10.
The Brazilian company made an initial proposal on a possible combination with Ferrous on Nov. 15, 2010, according to the letter. Ferrous’s advisers at Deutsche Bank AG and MMX representatives also had talks in August last year, it says.
Harbinger held more than 26 percent of Ferrous as of March. BHP Billiton Ltd., the world’s largest mining company, held talks to potentially take over Ferrous last year, two people with knowledge of the negotiations said in October. MMX, in which billionaire Batista controls a 42 percent stake, has a market value of 4.59 billion reais ($2.6 billion.)
“The long-term synergies are sizable because the main problem with MMX is its lack of iron ore reserves, which is what Ferrous can offer,” Raphael Biderman and Alan Glezere, analysts at Osasco, Brazil-based Banco Bradesco SA, wrote in a report yesterday. “A deal such as this would be good for MMX’s minority shareholders in the long term. On the other hand, there would be a sizable dilution in the short term.”
MMX gained 2.3 percent, or 17 centavos, to 7.57 reais at 2:33 p.m. in Sao Paulo trading. Yesterday it jumped as much as 5.8 percent before closing 0.7 percent lower at 7.40 reais. Ferrous’s proposal values MMX at 6.63 reais a share based on the 30-day average price as of Dec. 16, according to the proposal.
Ferrous holders would own 53 percent of the combined company, with MMX owners having the rest, according to the proposal, signed by shareholders of Ferrous and addressed to Rio de Janeiro-based MMX’s board.
MMX, in a statement sent after the close of trading yesterday, said it’s not interested in a merger with Ferrous. An official at the company wouldn’t confirm if MMX has replied to Ferrous’s proposal.
MMX said in a regulatory filing today it “constantly” receives proposals for partnerships and other commercial contracts. These are often “incomplete or lack merit or economic fundamentals,” it said. The company added that it sees no clear reason for a recent increase in trading of its shares.
The merger would create a company, which would be listed on the Novo Mercado, with an equity value of $4.87 billion, the letter shows. Bovespa’s Novo Mercado is a segment of Brazil’s stock exchange with stricter requirements for disclosure.
Philip Walters, an external spokesman for Ferrous in London, declined to comment when contacted by Bloomberg News. Lew Phelps, a spokesman for Harbinger, declined to comment.
While its base case was for an acquisition of MMX through a merger of shares, “Ferrous is open to considering other mutually beneficial structures, including a potential transaction structure in which MMX undertakes a merger of shares with New-Co and MMX is the surviving entity,” it said.
CEO Steps Down
Separately, Ferrous said yesterday that Chief Executive Officer Mozart Litwinski is stepping down to pursue “personal business interests,” according to a statement. He was appointed CEO in April 2009.
Ferrous, which shelved plans for a $400 million London initial public offering in 2010, began iron-ore output in March of last year.
A combination of Belo Horizonte-based Ferrous and MMX “will create one of the leading players in the seaborne iron ore sector,” the letter shows. The new entity would have combined resources of 7.1 billion metric tons of iron ore and exploration potential for a further 3 billion tons. It could produce 59 million tons of the raw material a year by 2016, according to the letter.
There may be synergies in a deal given both companies have assets in Brazil’s “iron quadrangle” and require rail or pipeline facilities as well as a port, BMO Capital Markets analyst Tony Robson wrote in a report yesterday.
The proposed purchase of MMX was approved by Ferrous’s board and shareholders on the board representing 72.2 percent of the stock, the letter shows. Ferrous said MMX was worth $4.96 billion using a so-called sum-of-the-parts valuation, the letter shows.
The equity value for Ferrous under the plan is $1.59 billion, based on a sum-of-the-parts valuation of $3.45 billion, it said. Ferrous will also contribute $1 billion in cash, giving it an equity valuation under the offer of $2.59 billion.
The bid from Ferrous “doesn’t appear very attractive” for MMX shareholders, UBS AG analyst Rene Kleyweg who has a “buy” rating on the stock, wrote yesterday in a note to investors. “The implied relative valuations, in our opinion, highlight the lack of credibility to the offer.”
Ferrous has signed sales accords with Glencore International Plc and Noble Group Ltd. It was set up in 2007 and raised $1.26 billion from private placements between June 2007 and August 2008, according to its website.
MMX plans to spend at least 7.9 billion reais to increase its iron-ore production capacity fivefold to 53 million tons by 2016 as it taps rising demand from China and other emerging nations. The company is building its 2.4 billion-reais Sudeste port in Rio’s Sepetiba bay, scheduled to start operating in the first quarter of 2013, with an initial capacity to ship 50 million tons of iron ore.
Ferrous was in talks with potential strategic investors and lenders to help fund a $4 billion expansion, two people with knowledge of the matter said in March. The company had discussions with mining companies and steelmakers in China, Japan, Korea and Brazil, the people said at the time.
Ferrous had previously outlined plans to produce iron ore at a rate of 25 million tons a year by the end of 2013, with an expansion to raise that to 50 million tons by 2016. It previously estimated the cost of the first stage of its Viga project at $3 billion.
Brazil is the world’s largest exporter of iron ore behind Australia.