When Lima’s Grupo Milpo announced in May it intended to buy a controlling stake in a neighboring mine, the ground rocked. No company had ever launched a hostile bid for a competitor in the conservative Peruvian mining industry.
Owners of the target mine, Atacocha, charged that long-standing friendly relations between the two companies were being ripped to shreds. Milpo and Atacocha produce zinc side-by-side in the Andes and their mines are so close together that the companies actually exploit the same deposit of ore. Many in the Peruvian business world saw Milpo’s bid as practically uncouth. Previous mining industry acquisitions were polite, private arrangements between controlling groups of shareholders.
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Daniel Córdoba, |
Using the recently revised Peruvian public acquisition law, known by its Spanish acronym OPA, Milpo launched a $43 million tender offer to buy up to 100% of Atacocha’s shares. Milpo already owned 4.4% of Atacocha, which is controlled by the Spanish Gallo Group and Peruvian banks. The deal is expected to close in July. Milpo’s main shareholders are the Baertl Group and the Ucovich Group, both traditional mining families, the Bustamente Group, a strategic investor, and Beatriz Picasso, daughter of one of the company’s founders. Thirty-three percent of the company’s shares are publicly held. Milpo is converting these non-voting shares to common, voting stock.
Milpo began a big change in 1999, shifting from a family-managed to a professionally managed company,” says Daniel Córdova, who joined the company’s new management team as chief financial officer in 1999. “We have changed the whole corporate structure.”
The new team decided to pursue Atacocha more aggressively. The companies had frequently explored the idea of merging before but could never settle on a price. Cash-rich Milpo, which restructured its debt two years ago quintupling its cash to $28 million and reducing its debt by a third to $37 million, decided that this time, it would close the deal.
“The management team is very strong and proactive and that is the reason this is happening now,” says Córdova. He earned his PhD in economics at Grenoble University in France, advised the Peruvian government in the 1990s on trade and privatizations, and led the country’s export association. “The synergies of the two mines are obvious and we have a strategic plan to grow our operations.”
Milpo is a minor player in the Peruvian mining industry, with revenues of $87 million last year. But two years ago, it was even smaller, owning a single zinc mine that generated $45 million a year. Since then it has bought another Peruvian mine, a copper operation in Chile and with the expected consolidation of Atacocha into its Porvenir mine, Milpo expects its revenues to exceed $200 million within two years.
Given the companies’ shared history and proximity, and a country unfamiliar with unsolicited bids, Córdova says the social and political aspects of the Atacocha purchase have been more daunting than the financial ones. “Takeovers are taken as insults to the traditional owner,” he says. “The establishment is against it.”
Córdova says, “In Peru, the concept of a public offer is clear in the law, but it is not yet something that the market is fully aware of.” Under Peruvian law, counter offers to a public bid must be made in public, but Milpo worried that rival companies would undermine its offer by striking a separate deal for Atacocha with a few of that company’s main shareholders.
Banco de Crédito del Perú, the country’s largest bank, and Banco Wiese Sudameris are leading the acquisition financing. Milpo is taking out a 180-day, $43 million bridge loan. Just under half of the loan is guaranteed by cash collateral while sales contracts and the Atacocha shares being acquired guarantee the remainder. After the acquisition is complete, Milpo plans to restructure its $60 million debt over a minimum of five years. The company will also likely issue fresh equity either in Canada or the US to reduce net debt.
Córdova is using Milpo’s experience to launch an association to promote Peru’s capital markets. Says Córdova, “We are all learning about real capitalism, something that is still new in Peru.” LF