Arrium deal lifts hopes for Whyalla

Australia’s Future Fund is backing a US private equity firm’s acquisition of Arrium’s Moly-Cop mining services.

Australia’s $140 billion Future Fund is backing US private equity firm American Industrial Partners in its acquisition of Arrium’s Moly-Cop mining services division for $US1.23bn ($1.6bn).

It is understood that the sovereign wealth fund is an investor within the funds of the new owner, with the possibility that it could take a stake in the business — the so-called “good bit’’ of Arrium — at a later stage.

The sale to AIP ensures Arrium’s 20-plus lending syndicate, which is owed $2.8 billion from the ­collapsed integrated steel group, will probably be paid at least 55c in the dollar after the company was placed into voluntary administration in April.

Attention now falls on the prospects of the administrator KordaMethna and its advisers finding a buyer by year end or early next year for Arrium’s Australian steel business, including the Whyalla steelworks and associated iron mines, on which the South Australian town of 22,000 people depends.

KordaMentha partner Mark Korda told The Weekend Australian that there were a “handful of potential bidders’’ for the sale or recapitalisation of the remaining Arrium business. He said the parties were currently in the data room, with a deal likely in the first quarter of next year.

Mr Korda said the list of contenders was confidential. Meanwhile, reports yesterday that South Korean steel giant Posco had pulled its offer for the Whyalla-centric business are believed to be off the mark.

Others who have shown some level of interest in all or parts of the business include Brookfield, Blackstone and BlueScope Steel, although it is unclear which parties remain in the contest.

Even so, Mr Korda said the planned closure of Victoria’s Hazelwood coal-fired power plant would trigger higher power prices, which could be critical for big energy users such as Whyalla. “The whole industry is concerned about Australian policy and energy users in Australia have one of the highest gas prices in the world. To be competitive internationally, you don’t need electricity prices going up.”

Moly-Cop is the grinding media business — steel balls used to grind ores in mineral processing — which Arrium acquired in 2010. It is not part of the Arrium administration.

It has a strong market share and is profitable, with KordaMentha and adviser Deutsche running a dual-track process that could have also seen it listed on the ASX.

However, in a closely fought out contest, New York-based AIP fended off competition from rival fellow US private equity firm KPS Capital and Australian equity investors to purchase the operation.

Mr Korda said he was very pleased with the amount raised in Moly-Cop deal. “There’s about $4 billion worth of Arrium creditors — so it goes a long way.”

“The sale of Molycop is a great step forward for all the creditors of Arrium. It’s probably $300-$400m more than the sale price that was offered at this time last year,’’ Mr Korda said, noting that it also meant there would be no job losses in the mainly Americas-based operations of Moly-Cop.

Mr Korda was speaking after the second creditor’s meeting in Sydney.

The task of finding a buyer for the Whyalla steelworks and its iron mines has improved in line with the rebound in iron ore prices from $US40 a tonne when Arrium went under to as much as $US65 a tonne more recently.

But an offsetting factor has been the massive price increase in coking coal from under $US100 a tonne to $US250 a tonne.

A newcomer to the Australian market, AIP has a stable of logistics, engineering and manufacturing companies and more than $US3.5bn worth of funds under management.

Equity analysts working on a prospective float earlier valued Moly-Cop at between $US1bn and $US1.4bn, on the basis of $US147m forecasted earnings before interest, tax, depreciation and amortisation for the 2017 financial year.

The business was well received by institutional fund managers, but they were beaten on price, offering to pay seven times the company’s earnings, or about $1.4bn, which was below the offer of $1.6bn, equating to about eight times.

The deal will see Moly-Cop sold for a price higher than the $1.5bn bidders offered to pay for the operation in a previous sale attempt process run by UBS and Lazard, in which Platinum Private Equity and Argand were the two final contenders.

Last year’s sale process resulted in a proposal by Blackstone’s division GSO, which proposed to pay about 45c in the dollar to ­lenders in what was widely viewed as a loan-to-own scenario.

After lenders objected to Blackstone’s terms, the entire company was instead placed in voluntary administration, which launched a revised sales process for Moly-Cop.

Moly-Cop chief executive John Barbagallo said it would bring “certainty and confidence” for customers, suppliers and employees.

Completion is expected in early 2017, subject to regulatory and lender approval.

ADDITIONAL REPORTING: BARRY FITZGERALD