A Copper King In Mexico?

Grupo Mexico will be global No. 3 if its bid for Asarco pans out

German Larrea, the 45-year-old chairman of Grupo Mexico, seems to have a taste for grand gestures. If he wins his current takeover battle for Asarco, the U.S. copper producer, he will celebrate more than just a $2.2 billion deal. For Larrea, there's national pride at stake, too. A century after Asarco was founded, it is preparing to sell itself to a company it spawned south of the border a generation ago. And with the Asarco purchase, Grupo Mexico will be the world's third-largest copper producer--with assets from Arizona to Peru's Atacama Desert.

But the execs working under Larrea aren't dwelling on history. Their concerns are Grupo Mexico's future as a global company. Faced with the prospect of becoming a marginal player in a fast-consolidating industry, Grupo Mexico's management began looking earlier this year for foreign acquisitions. It already owned 10% of debt-burdened Asarco, which has been seeking a merger since July. On Oct. 15, Asarco's board voted to accept Grupo Mexico's offer of $29.75 a share. "By acquiring Asarco, they stay in the game," says Victor Lazarovici, a senior metals analyst at brokerage Nesbitt Burns Inc. in New York.

Grupo Mexico's first task is to clinch the deal. It's not the only suitor: It's bidding against Phelps Dodge Corp. in Phoenix. The No. 2 producer, Phelps has until Oct. 23 to trump Grupo Mexico. But most analysts say it will fold.

In going multinational, $1.4 billion Grupo Mexico is following just a handful of Mexican companies. But it's paying for the honor. It will spend about $1.2 billion in cash. Asarco lost $131 million last year on sales of $2.2 billion. It also has some $1 billion in debt--more than doubling Grupo Mexico's net liabilities of $700 million. While analysts think Grupo Mexico is paying over the odds for Asarco, they expect it to manage the debt--in part by selling off Asarco's chemical and building-materials divisions.

Grupo Mexico has carefully lined up its ducks. Chase Manhattan Bank and Chase Securities Inc. are financing the deal, and Grupo Mexico has more than $500 million in cash and securities. It also is counting on rebounding copper prices. From a 12-year low of 62 cents a pound in May, strong global demand has pushed prices to 80 cents; they could rise to 90 cents a pound next year.

"TOUGH." Grupo Mexico wants to squeeze at least $100 million out of Asarco's cost structure. It could end up shutting down some of Asarco's key assets, analysts say, including its New York headquarters and a pollution-plagued smelter owned by Southern Peru Copper Corp., in which Asarco holds a 54% interest. Says Sandra Morfin, an analyst at Santander Investments in Mexico City: "Their priority is cost control, and they're tough."

So they have been since 1965, when Larrea's father, Jorge, led a group that bought control of Asarco's Mexican operations. The company expanded dramatically a decade ago, when Mexico privatized its state-owned mining operations. It has invested $700 million in the past four years and is now among the world's lowest-cost producers of copper, zinc, and silver. Not for Grupo Mexico a glass-sheathed tower; it operates in a down-at-heel neighborhood, from a 10-story building adorned by a rock from a company mine.

The gem in the Asarco purchase is New York-listed Southern Peru, which earned $55 million last year on sales of $628 million. It, too, is among the lowest-cost producers and boasts more than 40 years' worth of high-grade reserves. "It's one of the great operations in the world," says Nesbitt's Lazarovici. "It's a platform for growth in South America."

Grupo Mexico has long entertained a New York listing, and the Asarco deal will put those plans into high gear. But going global could prove a shock to traditionally secretive German Larrea and Grupo Mexico. Other Mexican companies--Cemex, the cement giant, and Grupo Televisa--have learned the hard way what full disclosure means. Now that Larrea wants to introduce his company to global investors, he'll have to introduce himself, too.

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