Arrium lenders consider $1.5b Moly-Cop float
Arrium's lenders have been asked to consider a $1.5 billion initial public offering for the bankrupt company's crown jewel, grinding media business Moly-Cop.
Sources close to the lenders said that investment banks had talked at length about the benefits of exploring an ASX-listing for Moly-Cop, in written pitches submitted for Arrium's sell-side mandate during the past fortnight. [Arrium's sale is scheduled to start in July.]
With about $2.8 billion at risk, you cannot blame Arrium's lenders for taking a close interest in the company's most saleable asset, which has been largely operating as usual through the company's administration process. A strong price for Moly-Cop and quick process is their best - or perhaps only - chance of avoiding a multi-billion dollar haircut.
The quickest deal would be to go back to the same private equity tyrekickers who failed to meet the then-Arrium board's price expectations with bids in February. However, another round of PE bids will only be as good as United States debt markets and with debt markets effectively closed to big leveraged buyouts, that path does not look promising.
http://www.copyright link/content/dam/images/g/p/2/x/n/e/image.imgtype.afrArticleInline.620x0.png/1464081136631.png <img src="/content/dam/images/g/p/2/x/n/e/image.imgtype.afrArticleInline.620x0.png/1464081136631.png" alt="Arrium mining consumables earnings." width="620" class="lazy620x0"/>
Arrium mining consumables earnings.
The other option is to market to potential trade buyers, which would require a lot more hand-holding and education than PE, and still not guarantee an outcome.
Which is why the lenders are willing to at least consider an IPO.
Fund managers and sell-side analysts are familiar with the business, having watched it prop up Arrium's financial position in recent years. While there have obviously been better times to be selling a mining services unit, fundies have watched its earnings grow year-on-year for the past two years, and analysts expect EBIT could hit $200 million by 2018.
The question is whether to list the business in Australia or offshore.
http://www.copyright link/content/dam/images/g/p/2/x/m/m/image.imgtype.afrArticleInline.620x0.png/1464081032298.png <img src="/content/dam/images/g/p/2/x/m/m/image.imgtype.afrArticleInline.620x0.png/1464081032298.png" alt="Arrium net present value." width="620" class="lazy620x0"/>
Arrium net present value.
While most of Moly-Cop's earnings are from offshore, Australian IPO markets would allow the lenders to sell as much as 70 or 80 per cent of the company and retain only a minority stake. US investors would likely demand lenders keep at least 50 per cent, meaning lenders would be forced to sit on meaningful equity stakes.
As for valuation, analysts and fundies reckon Moly-Cop would likely be worth 10-to-12-times earnings pitting the company's enterprise value at more than $2 billion. And with a light debt load - say one-times earnings - the market capitalisation could still be around the $2 billion mark, which is large enough to attract investors from the big end of town.
You can bet UBS and Lazard - who have been in Arrium's tent for years - will be sticking their hands up for the sell-side mandate. But they are expected to face stiff competition from rivals including Citi, Credit Suisse, Goldman Sachs, JPMorgan and the like, who'll be keen to pitch their credentials and spruik the benefits of a change in thinking.
Rothschild is also expected to be in the frame, with at least some of the lenders calling for an independent adviser with a global franchise.
