Nemak Increases its Global Reach

Seals deal for Teksid's North and South American casting plants

March 21, 2007 — TK Aluminum Ltd. has completed the sale of its five Teksid Aluminum metalcasting plants in North and South America to Nemak S.A., under revised terms from the sale agreement originally reached in November 2006. It said the transaction value is $414 million in cash, plus a 5.64% "synthetic equity" interest in the Nemak business.

The transaction may be just one step in Nemak's agressive global expansion. The company was formed as a joint venture of Mexican conglomerate Grupo Alfa and Ford Motor Co., though Alfa is now the dominant participant, and its investments are driven by automakers' growing reliance on cast aluminum engine parts. In a recent interview Alfa CEO Dionisio Garza Medina predicted Nemak's next expansion would be into Asia, specifically China, where it is likely to build new capacity because attractive targets do not yet exist.

Having also bought Hydro Aluminum's aluminum casting operations in the past month, as well as those of Rautenbach in 2005, it has a solid presence in Europe and the Western Hemisphere. Its current line-up of operations supply engines and parts to Fiat, Ford, General Motors, Nissan, and Renault, and Medina acknowledged that supplying Honda and Toyota are more goals for the group.

The Teksid plants now being sold to Nemak are in Dickson; TN, Sylacauga, AL; San Agustin, Argentina; Betim, Brazil; and Frontera, Mexico. TK established Teksid in 2003 when it acquired Fiat's aluminum casting operations.

Two other assets originally included in the transaction, Teksid Aluminum in Poland and a 70% interest in a joint venture plant at Nanjing, China, have yet to be transferred. The revised transaction agreement — which takes into account Nemak's subsequent acquisition of the Hydro Aluminium casting operatons — calls for TK Aluminum to receive a total of $485 million in cash for all seven plants, subject to adjustments, along with a 6.68% "synthetic equity interest" in the Nemak business after the sale closes.

The value of TK's equity interest in Nemak may be revised downward, subject to various indemnities, guarantees, and repayment of a $25-million loan issued in connection with the transaction. Also, the equity may be adjusted based on "dilutive events, changes in capitalization and the occurrence of certain major transactions."

The revised terms also require Nemak to supply TK Aluminum with "certain limited assistance," including assuming up to $2 million in liabilities relating to a reorganization of the remaining Teksid operations. Also, Nemak's parent Grupo Alfa agreed to provide TK with credit enhancement totaling up to $25 million.

Apart from the sale to Nemak, Teksid Aluminum reports it has continued to pursue options for its remaining operations in France, Italy, and Germany, and confirms it is in discussions with potential buyers of those operations. It listed several conditions which must be met before any sale is final, including a definitive sale agreement.

TK Aluminum said the proceeds from the initial sale to Nemak have been used, in part, to repay some outstanding debts, and to fund tax payments anticipated following the current transaction.

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