Nexans to Buy Cable Unit of Madeco for $822 Million

Nexans SA, the world's biggest maker of cables and wires, agreed to buy the cable unit of Chile's Madeco SA for $822 million to tap an expanding Latin American market.

Nexans will pay $422 million in cash and give Santiago, Chile-based Madeco a 9 percent stake in the company via 2.5 million new shares, the Paris-based company said in a statement.

The purchase of the Chilean business, which had sales of $672 million last year, comes after the French company doubled its Asia-Pacific revenue through the December 2006 acquisition of Olex Cables for A$515 million ($459 million). Nexans has boosted sales of higher-margin high-voltage cables as power producers seek to meet increasing electricity demand.

``The deal fills a hole, as Nexans lacked a significant presence in fast-growing Latin America,'' said Kepler analyst Pierre Boucheny, who has a ``buy'' rating on the stock. ``But the transaction isn't cheap. Nexans is betting it can improve Madeco's profitability.''

Nexans shares fell 4.86 euros, or 4.8 percent, to close at 96.81 euros in Paris. The stock is little changed this year, giving the company a market value of 2.5 billion euros. Shares of Prysmian SpA, Nexans' closest competitor, have gained 25 percent since its initial share sale in May, valuing the company at 3.3 billion euros.

Madeco, Chile's biggest maker of copper wire, surged 16 pesos, or 25 percent to 80 pesos in Santiago, and was trading at 72.5 pesos at 17:38 p.m. Paris time.

Nexans aims to complete the purchase by the third quarter next year, pending antitrust approval. The unit, which boasts higher profitability than Nexans, should contribute to the French company's earnings by 2009, Vincent said. The cash part of transaction will be financed by existing credit lines.

``The acquisition will allow us to boost our presence in fast-growing South American markets,'' Chief Operating Officer Frederic Vincent said on a conference call. ``We are buying growth, but also profitability.''

Madeco's cable unit, which represents about 65 percent of the parent company's sales, generated earnings before interest, taxes, depreciation and amortization equal to 10.6 percent of revenue, compared with a margin of 6 percent at Nexans, Vincent said.

These higher margins can be explained by strong demand and less competitors, Nexans Chief Executive Gerard Hauser said today in an interview in Paris.

``Profitability at Madeco has decreased from 13 percent last year to 10 percent this year though'' Kepler's Boucheny noted. ``And Nexans, which trades at 7 times Ebitda, is paying Madeco's unit at 9 times Ebitda.''

Madeco's wish to receive Nexans shares is ``a show of confidence in the future,'' Hauser said. ``Madeco's unit is a very beautiful asset and Nexans will remain the world's number one for quite some time.''

Sales at the unit rose 12 percent last year as oil exploration companies expanded drilling off the coasts of Brazil, where Madeco is the largest cable maker. About 43 percent of sales came from Brazil, 28 percent in Chile, where demand is driven by a booming mining industry, 18 percent in Peru and 6 percent in Argentina.

Nexans will propose that a representative of Madeco sit on its board, Vincent said.  ``We have the means to pursue other acquisitions,'' Hauser said. Nexans' chief said the company will target North America and Asia, notably Japan and China, where it is studying two purchases. The company may look at acquisitions ``of significant size,'' he added.


source from wireworld