The Norwegian aluminum producer, Norsk Hydro (NHY) have Wednesday issued a risk warning related to the company’s planned takeover of the Brazilian assets from Vale Austria Holdings GmbH. The risks involved could have a material adverse effect on the trading price of the share, and for the entire company, Hydro disclose.
“Hydro could be included in criminal or civil proceedings related to, among others, product liability, environment, health and safety, anti-competitive, anti-corruption or other integrity legislation or other forms of commercial disputes which could have a material adverse effect on Hydro.”
The worlds fourth largest aluminum producer issued Wednesday morning a so-called “Information Memorandum” to investors via Oslo Stock Exchange information system. The information memorandum has been prepared in connection with the agreement between Norsk Hydro and Brazilian Vale S.A. to take over certain assets and interests from Vale Austria Holdings.
According to the statement, a numerous factors may cause the Group’s, Vale Aluminium and/or the Combined Group’s actual results to differ materially from historical or anticipated results, some of which are beyond the Group’s control.
The statement is a so-called “Information Memorandum” that public companies are obligated to issue in connection with takeovers and mergers.
However, it seem almost like too much of coincidence that the disclosure comes after professor Nouriel Roubini said the Brazilian economy is overheating and asset bubbles may be developing, the day after VALE led the biggest drop in the Brazilian Bovespa Index since May 20. And less than 12 hours after U.S. authorities announces a criminal investigation into the oil spill incident in the Gulf of Mexico and thereby signaling a tougher attitude towards the most polluting industries.
The Chinese Joker
Both Hydro and VALE, both among the worlds largest provider of basic materials, are heavily exposed to the Chinese economy.
Prices for 62 percent iron-content ore arriving at Chinese ports have dropped 23 percent to $144 a ton from $186.50 on April 21, according to The Steel Index.
Vale SA, the world’s biggest iron ore exporter, will raise contract prices for the quarter starting July 1 to reflect higher average spot prices for three months March to May, Jose Carlos Martins, executive director of iron ore business, says according to Bloomberg News.
Chinese steelmakers may default on contracts should spot prices fall below the contract levels, he says.
If the demand from China drops, or worse, go into reverse, it would have an impact on the market that could trigger a materialization of the risk disclosed by Norsk Hydro today.
Keep in mind Murphy’s Law; “Anything that can go wrong, will go wrong.”
Important factors that could cause unexpected trouble for Hydro and VALE include:
* The possibility that various conditions to the closing of the Transaction may not be satisfied or waived;
* The risk that the Transaction is not completed within the anticipated time period;
* The risk that Hydro’s shareholders fail to approve the planned offering of new Shares with pre-emptive rights for holders of the Shares, holders of unredeemed founder certificates and holders of unredeemed subscription certificates (the ―Rights Issue‖) or that the Company, for any other reason, is unable to successfully complete the Rights Issue;
* The Company’s ability to integrate successfully Vale Aluminium and the Company’s other recent or future acquisitions or the risk that such integration may be more difficult, time-consuming or costly than expected;
* The risk that Vale Aluminium may be subject to liabilities of which the Company is unaware; to:
* The Company’s ability to realize the anticipated synergies and other benefits from the Transaction and within the expected time-frame;
* Fluctuations in supply and demand, and therefore the price of the Group’s and Vale Aluminium’s products;
* The Group’s ability to meet its debt service obligations;
* The impact of global recessionary conditions and the reactions of investors, national and transnational regulators and financial institutions;
* Fluctuations in the price levels of aluminum, alumina, bauxite, energy and other essential raw materials;
* Competition and actions by competitors and others affecting the global or regional market within the Group’s and Vale Aluminium’s industry, including changes to industry capacity, utilization and product pricing;
* Effects of hedging raw material, energy costs, foreign currencies and interest rates;
* The impact of any counterparts defaults;
* The impact of a downgrade of Hydro’s credit rating;
* The impact of any negative changes in reserves estimates;
* The impact of unsuccessful technological development;
* The impact of any accidents on the Group’s properties, the environment or the health of
* The Group’s and Vale Aluminium’s employees;
* The impact of changes to health, safety, environmental and other laws, regulations and policies;
* The impact of any legal proceedings;
* The impact of any liability transferred to successor companies;
* The impact of any labor disputes and adverse employee relations; and
* The loss of key management personnel.
May Not Be Able To Secure Funding
“In addition to the other information set out in this Information Memorandum, the following risk factors should be carefully considered when analyzing Hydro and/or the Transaction, including the related financing. The risks described below could have a material adverse effect on the business, financial condition or results of operations of Hydro or, following the Transaction, the Combined Group (and, accordingly, all references to Hydro or the Group in this Section shall be construed also as references to the Combined Group, unless the context otherwise requires). Accordingly, the risks described herein could have a material adverse effect on the trading price of the Shares. The information below does not purport to be exhaustive. Additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial may also have a material adverse effect on the business, financial conditions or results of operations of Hydro or, following the Transaction, the Combined Group,” Hydro writes in the memorandum.
* Hydro continues to face challenging market conditions which could have an adverse effect on its operating results and liquidity.
* Hydro may not succeed in reducing the operating cost of its smelter portfolio sufficiently to compensate for an extended period of weak aluminum markets.
* Hydro is facing uncertain demand in its downstream aluminum markets.
* Hydro faces a continued high risk of counterpart’s default.
* A deterioration in Hydro’s financial position or a downgrade of its ratings by credit rating agencies could increase Hydro’s borrowing costs and cost of capital and have a material adverse effect on its business relationships, including possible joint ventures and new growth initiatives.
* Price volatility can impact Hydro’s operating costs and can also have a substantial adverse effect on Hydro’s reported operating results.
* Hydro’s reported results and competitive position are exposed to changes in currency exchange rates.
* Hydro’s downstream business is increasingly exposed to competition from China.
* Failure or delays in the execution of major projects could have a material negative impact on Hydro’s competitive position.
* Emerging or transitioning markets present a competitive threat to Hydro’s business.
* Hydro is exposed to increasingly onerous regulation concerning the reduction of CO2 emissions.
* Hydro’s business depends on its ability to replace long-term energy supply contracts on competitive terms.
* Future acquisitions, mergers or strategic alliances may adversely affect Hydro’s financial condition.
* Business development is more likely to occur in emerging and transitioning markets characterized by higher legal, fiscal, regulatory and implementation risk.
* Investments as a minority partner in jointly controlled entities and associates reduce Hydro’s ability to manage its business portfolio.
* Hydro may not succeed in developing technological solutions to support its growth strategies.
* Major accidents could result in substantial claims, fines or significant damage to Hydro’s reputation.
* Hydro may not be successful in attracting and retaining sufficient skilled employees.
* Hydro could be materially adversely affected by legal proceedings or investigations.
* Hydro may be subject to misconduct by its employees.
* Hydro may be subject to unforeseen liabilities for environmental damage.
* Hydro may not be able to maintain sufficient insurance to cover all risks related to its operations.
* Hydro may be subject to liabilities relating to businesses transferred to successor companies.
In addition, Hydro points out specific risks related to the operations in Brazil.
Here’s you’ll find a copy of Hydro’s Information Memorandum: Informasjonsdokument.pdf
The shares of Hydro is down 1% at Oslo Stock Exchange Wednesday afternoon, while the OSE Benchmark Index have gained 0,5%.
Hydro has lost 16,6% of its market value over the last month.
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