business

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.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE