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(Updates with Goldman Sachs involvement in second paragraph.)
Oct. 17 (Bloomberg) -- Grupo Mexico SAB must return $1.3 billion in shares to Southern Copper Corp. for forcing the unit to overpay for a Mexican mining company, a Delaware judge ruled.
Southern Copper, previously named Southern Peru, bought a 99 percent stake in Minera Mexico, a company owned by Grupo Mexico, in April 2005 for $3.75 billion, higher than a previous valuation of $3.1 billion. The transaction was unfair and based on a flawed analysis by Goldman Sachs Group Inc., which served as financial adviser, Delaware Chancery Court Chief Judge Leo Strine ruled.
“A focused, aggressive controller extracted a deal that was far better than market,” Strine wrote in a 106-page opinion on Oct. 14.
Southern Copper shareholders sued on behalf of the company claiming that it overpaid because directors and Goldman Sachs failed to derive a true value for Minera and instead relied on a relative analysis when comparing the two companies, according to court documents.
The analysis “obscured the actual value of what Southern Peru was getting and that was inclined toward pushing up, rather than down, the value in the negotiations of what Grupo Mexico was seeking to sell,” Strine wrote.
Juan Rebolledo, a Grupo Mexico spokesman, said the company will appeal the ruling.
Grupo Mexico, which owns about 80 percent of Southern Copper, “is in total disagreement with the court’s ruling,” the company said in a separate statement. The form to make the payment to compensate Southern Copper still needs to be set by the court, Grupo Mexico said.
Goldman Sachs and a special committee of Southern Copper directors made “strenuous efforts” to justify the deal by optimizing Minera’s cash flows, discounting the fact that the Mexican company had trouble paying its bills, and agreeing to pay a special dividend, Strine said in the ruling.
“The special committee turned the ‘gold’ it was holding in trust into ‘silver’ and did an exchange with ‘silver’ on that basis, ignoring that in the real world the gold they held had a much higher market price,” Strine wrote.
Strine faulted Goldman Sachs for shifting its client’s focus to a “non-real world set of analyses” and helping the special committee directors “rationalize” their decision.
Andrea Rachman, a spokeswoman for New York-based Goldman Sachs, declined to comment on Strine’s criticism of the company.
At the time of the transaction, Minera Mexico held the world’s second largest copper reserves after Chile’s state-owned Codelco. Minera was suffering from strikes at its Cananea and La Caridad units in Sonora state, Mexico’s largest copper mines, and had a net debt of $1.06 billion.
Goldman Sachs initially told Southern Copper directors that Minera’s value was probably more than $1 billion less than the $3.1 billion Grupo Mexico suggested. The adviser “stretched to justify the deal” by using a range of multiples for cash flow that exceeded comparables. Goldman Sachs also estimated that Minera would earn almost as much as Southern Copper in 2004 and more than the company in 2005, according to court papers.
“Neither estimate turned out to be even close to true,” Strine wrote.
Grupo Mexico must return to Southern Copper the number of shares needed to satisfy the $1.3 billion award plus interest, Strine said. He gave lawyers for the company 15 days to propose a payment plan.
Grupo Mexico fell 3.9 percent to 33.87 pesos in Mexico City trading today. Southern Copper shares dropped 3 percent to $27.44 in New York trading.
The case is In Re Southern Peru Copper Shareholder Derivative Litigation, CA961, Delaware Chancery Court (Wilmington).
--With assistance from Christine Harper in New York, Phil Milford in Wilmington, Delaware, and Carlos Manuel Rodriguez in Mexico City. Editors: Stephen Farr, Jonathan Roeder
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