Vale Sells $1.8 Billion Stake in Norway’s Norsk Hydro

Vale SA, the world’s biggest iron ore exporter, sold its stake in aluminum-maker Norsk Hydro ASA for $1.8 billion, about half the holding’s value when the Brazilian company acquired it in 2011.

Vale sold 407.1 million shares in Oslo-based Hydro for 25 kroner each, the Rio de Janeiro-based company said today in a statement. If an over-allotment option of 40.7 million shares is exercised in full, Vale will have disposed of its entire 22 percent stake for 11.2 billion kroner ($1.82 billion).

The miner is selling assets, putting projects on hold and focusing on its more profitable iron-ore business in a bid to recover profit margins after commodity prices fell. In September, it sold stakes in a cargo unit for about 2.7 billion reais ($1.2 billion) to Japan’s Mitsui & Co. and a Brazilian government fund after $1.47 billion of asset sales last year, including a coal mine in Colombia and 10 large vessels.

At 25 kroner a share, the deal prices the stake slightly above its value on Vale’s books, said Alan Glezer, an equity analyst at Banco Bradesco SA. “We view the likely transaction as positive as it strengthens Vale’s balance sheet, helping to alleviate part of the leverage pressure during an intense period of investment,” he said yesterday in a note.

Vale fell 2.5 percent at the close in Sao Paulo to 32.43 reais, the lowest since Oct. 25. Hydro declined 5.5 percent to close at 25.49 kroner in Oslo.

Boosting Cash

With the sale, Vale may be seeking to boost its cash position before a possible settlement in a 30.5 billion-real Brazil tax dispute, where the company may be asked to make a 20 percent downpayment, according to Grupo BTG Pactual.

“There are lingering concerns on a potential settlement with the government for payment of the foreign subsidiary profit tax dispute, which could be announced towards month-end,” BTG analysts led by Edmo Chagas said in a note to clients today. “A disbursement of 6 billion reais could require the help of asset sales in order to avoid depleting the company’s cash base.”

Vale has enough time to make a decision on the possible tax settlement before a Nov. 29 deadline, Chief Executive Officer Murilo Ferreira told reporters on Nov. 7. The company today didn’t immediately reply to an e-mail seeking comment on the use of the stake sale proceeds.

Board Seat

Vale received $1.08 billion in cash, the 22 percent stake and a seat on the board, after selling its bauxite and alumina assets in Brazil to the aluminum producer. Including assumed net debt, the value of the deal was $5.27 billion, Hydro said in February 2011.

The 22 percent stake was valued at $3.53 billion, based on a closing price of 44.63 kroner, when the asset sale was completed in February 2011, according to the 2011 statement.

DNB Markets and Morgan Stanley were joint global coordinators and book runners for the offering, Vale said. Vale increased the offer from a total of 224 million shares after an earlier book-building process.

Vale is seeking to complete the settlement of the share sale on Nov. 15, it said in the statement. The shares have been purchased by “several investors,” Hydro said in a separate statement today.

‘Uncertain Period’

“The potential Vale divestment has represented a key uncertainty for a long period of time” for Hydro, Thomas Lorck, an analyst at Arctic Securities in Oslo, said in a note to investors. Lorck upgraded his rating on Hydro to buy.

Vale was in a lockout period for two years after acquiring the stake and has been talking about a possible sale since the end of last year.

Vale is also studying the sale of its 40 percent stake in Brazilian bauxite producer Mineracao Rio do Norte SA and oil and gas assets, CEO Ferreira said Sept. 24.

“We also have a surprise that I won’t mention so you remain curious,” Ferreira told reporters in Belo Horizonte, Brazil, at the time. The company is “very focused” on its divestment plan and was working to make new announcements, he subsequently said Nov. 7 during an earnings conference call.

Cost Savings

As part of its cost-reduction efforts, Vale is also working to combine some of its nickel operations in Canada’s Sudbury basin with Glencore Xstrata Plc.

Vale officials have been saying they may consider selling the Hydro holding since at least December. CEO Ferreira said in April that the company won’t “discard” its stake and that short sellers of the Norwegian stock may “get tired” of waiting for a divestment.

The Brazilian miner wrote down $975 million on the value of the Hydro investment as part of $5.66 billion in charges and impairments taken during the fourth quarter of 2012, it said Feb. 27. Vale last week posted its first quarterly profit increase in more than two years.

“The offering of Hydro shares is consistent with Vale’s strategy of reducing its exposure to non-core assets, and a result of its focus on discipline in capital allocation and value maximization for shareholders,” it said in the statement.

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