Vale Seeks To Sell Its Entire Stake In Norsk Hydro As Part Of Divestment Program

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Vale (NYSE:VALE) has managed to sell nearly all of its 22% stake in the Norwegian aluminum producing company Norsk Hydro ASA. The company had offered to sell as many as 407 million shares in Norsk Hydro in an offering, and as many as 40.7 million additional shares via an over-allotment option. While all of the 407 million shares have already been sold for $1.66 billion, if the over-allotment option is exercised in full, Vale will have managed to dispose of its entire 22% stake in Norsk Hydro for $1.8 billion. [1]

Vale’s decision to sell its stake in Norsk Hydro is part of its strategy to get rid of non-core assets in order to reduce future capital expenditure on them and instead concentrate on its core operations.

We have a Trefis price estimate for Vale of $17, which represents a 10% upside to the current market price. We will be updating our price estimate shortly in view of the third quarter results.

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Vale’s Stake In Norsk Hydro

Vale had acquired a 22% stake in Norsk Hydro and a seat on its board in early 2011 after selling some of its bauxite and alumina assets in Brazil to the company. Vale received $1.08 billion in cash, a 22% stake in Norsk Hydro and a seat on its board. Including assumed net debt, the deal was valued at $5.27 billion at the time. The 22% stake alone was valued at $3.53 billion at a share price of 44.63 kroner.

Since then, the value of Norsk Hydro’s shares has fallen by 40% and Vale has been forced to write down the value of its investment in the company. Vale recorded an impairment of $975 million on its investment in Norsk Hydro in Q4 2012. The price of each Norsk Hydro share under the latest offering is 25 kroner, which represents a slight premium to its current book value in Vale’s accounts. While Vale has wanted to sell its Norsk Hydro stake for about a year now, it had been waiting for the share value to appreciate. This has not happened, largely because aluminum producers the world over are struggling due to low prices and rising costs. [2]

Why Vale Is Selling Stake

The latest stake sale is part of Vale’s divestment program. The company is selling assets that are not part of its core businesses of iron ore, copper, nickel, coal and fertilizers. Prior to the Norsk Hydro stake sale, Vale sold 36% of its stake in the logistics company VLI for $1.2 billion and is in talks to sell another 26%. The money raised from selling non-core assets is intended to be used for investment in future growth projects such as the S11D iron ore project in Brazil and the Mozambican coal operations. [3]

Another immediate reason for the timing of the Norsk Hydro stake sale could be the need to have enough cash on hand to deal with an adverse ruling in the ongoing protracted tax dispute with the Brazilian government. The government claims that Vale owes it 30.5 billion Reals in taxes while Vale has always denied it. The two sides may come to a possible tax settlement, under which Vale may be asked to pay 20% of the amount as downpayment. Paying this amount in cash would deplete the company’s cash base unless it makes alternative arrangements such as through stake sales.

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Notes:
  1. Vale prices offer to sell Norsk Hydro shares, Vale News Release []
  2. Vale Sells $1.8 Billion Stake in Norway’s Norsk Hydro, Bloomberg []
  3. Vale Sells Stake In Logistics Firm As Part Of Divestment Program, Trefis []