UPDATE: Grupo Mexico should get Asarco back, judge recommends

Vancouver – It’s time for a bankrupt American runaway to go back home to its Mexican parent company.

At least that’s what U.S. bankruptcy judge Richard Schmidt has essentially recommended in the latest chapter of Asarco’s four-year bankruptcy process that has most recently seen Grupo Mexico (GMBXF-O, GMEXICOB-M) wrangling with Indian-commodities giant Vedanta Resources (VDNRF-O, VED-L) for control of Asarco, a titan of America’s copper mining industry which Grupo Mexico acquired in 1999. The decision must still be vetted by another judge.

In what has been described as one of the most complex bankruptcy proceedings in America’s history, Schmidt has ruled that a reorganization plan proposed by Grupo Mexico – one of many submitted over the years by various stakeholders – is superior to a competing plan offered by Vedanta. In terms of cash Grupo Mexico has promised US$2.2 billion and Vedanta US$2.1 billion. Both plans also contain further sweeteners to entice creditors.

The decision is a major victory for Grupo Mexico as it tries to regain control of Asarco. After Grupo Mexico instructed Asarco to file for creditor protection in 2005, largely due to the American company’s outstanding environmental liabilities, a court stripped Grupo Mexico of its authority over Asarco and instead gave an independent board of directors the power to navigate it through reorganization.

Although Grupo Mexico has attempted to regain at least partial control of the board of directors through the years, it has been rebuffed by the courts. Then in 2008 it looked like Grupo Mexico might lose for good any chance of regaining control of its American subsidiary after growth-hungry Vedanta offered US$2.6 billion for Asarco – a deal that would have substantially paid off its creditors.

Asarco’s creditors include the U.S. government and a number of state governments seeking at least US1$ billion for Asarco’s environmental liabilities and also thousands of claimants who want compensation in the range of US$1-2 billion for health problems linked to Asarco’s now shuttered operations which manufactured asbestos and asbestos-containing products.

But the battle for Asarco soon heated up after the credit markets collapsed. Citing the freeze on financing, Vedanta dropped its offer and in spring, 2009, returned with a lowered bid of US$1.1 billion cash plus a $600 million loan.

That price appears to have appealed to Grupo Mexico’s thriftiness as it countered Vedanta’s bid with a US$1.3 billion offer of its own.

By the end of August, both Vedanta and Grupo Mexico had substantially ratcheted up their offers, with each claiming plans that would fully pay back Asarco’s creditors. Throughout the bidding process Asarco’s board of directors maintained support for Vedanta’s plan of reorganization.

The tenor of Grupo Mexico’s desire to regain control of Asarco also became more urgent in spring, 2009, after a U.S. judge ruled, in a separate court case, that Grupo Mexico unfairly transferred Asarco’s stake in what is now Southern Copper (PCU-N) to a Grupo Mexico subsidiary before moving Asarco into creditor protection in 2005. The court ruled Grupo Mexico must return a 30.5% stake in Southern Copper – at the time of the ruling worth about US$5 billion – plus about US$1.4 billion in missed dividends.

The ruling, which Grupo Mexico is appealing, will clearly mean less if Grupo Mexico regains control of Asarco since, even if it returned the Southern Copper stake, it would effectively be giving the 30.5% interest to itself.

While Schmidt’s ruling is undoubtedly a good one for Grupo Mexico, the last chapter of Asarco’s reorganization remains unwritten. For a final decision on the matter Schmidt has referred his recommendation to U.S. district court judge Andrew Hanen who has ultimate authority over deciding which route Asarco will take as it climbs out of bankruptcy. Like Schmidt, Hanen will have a chance to weigh the pros and cons of Grupo Mexico’s plans versus the desires of creditors.

What Hanen will decide, however, is difficult to gauge. Asarco’s lead bankruptcy counsel Jack Kinzie, while he would not comment on how likely it was that Hanen would uphold Schmidt’s decision, still left the possibility of further plot twists in the conclusion of Asarco’s bankruptcy process.

“I think there’s still some fog before us,” Kinzie says, adding: “It’s hard to say with certitude what’s going to happen.”

Kinzie notes Vedanta and Asarco’s other creditors and parties of interest all have court standing to object to judge Schmidt’s report and recommendation and says that they have until Sept. 10 to file their objections.

Whether Asarco or Vedanta plan to object is not clear. Asarco did not respond to questions about whether Schmidt’s decision essentially ushered in the end of the marathon bankruptcy case. In a press release Asarco president and CEO Joseph Lapinsky stated that the company’s board of directors will consider the judge’s recommendation in concert with advisors and Vedanta (through its subsidiary Sterlite) and then decide what to do.

As for Vedanta, its U.K.-based Vedanta officials did not respond to emails.