Business Context and Reporting Period
Company: Tronox Limited (formerly Tronox Incorporated)
Filing Type: Form 8-K (Current Report)
Date of Report: June 15, 2012
Event: Completion of the acquisition of Exxaro Resources Limited's mineral sands business (the "Transaction"). The combined entity operates under a new Australian holding company, Tronox Limited. Tronox Incorporated is designated as the accounting acquirer.
Key Financial Metrics (Pro Forma)
The following metrics are derived from the Unaudited Pro Forma Condensed Combined Financial Statements, presented as if the Transaction had been completed on January 1, 2011.
Balance Sheet (As of March 31, 2012)
| Metric | Amount (USD Millions) |
|---|---|
| Total Assets | $5,286.7 |
| Total Liabilities | $1,634.3 |
| Stockholders' Equity | $3,652.4 |
| Long-term Debt | $783.8 |
| Cash and Cash Equivalents | $258.6 |
Statement of Operations (Three Months Ended March 31, 2012)
| Metric | Amount (USD Millions) |
|---|---|
| Net Sales | $608.0 |
| Gross Margin | $223.2 |
| Income from Operations | $183.6 |
| Net Income (Continuing Ops) | $143.2 |
| Net Income Attributable to Tronox Limited | $131.8 |
| Diluted EPS | $5.11 |
Statement of Operations (Year Ended December 31, 2011)
| Metric | Amount (USD Millions) |
|---|---|
| Net Sales | $2,305.8 |
| Gross Margin | $651.3 |
| Income from Operations | $520.8 |
| Net Income (Continuing Ops) | $509.5 |
| Net Income Attributable to Tronox Limited | $451.1 |
| Diluted EPS | $17.50 |
Material Changes and Transaction Details
- Ownership Structure: Following the transaction, Exxaro holds approximately 38.5% of voting securities via Class B Shares, while former Tronox Incorporated stockholders hold approximately 61.5% via Class A Shares.
- South African Operations: Exxaro retains a 26.0% ownership interest in the South African operations (Exxaro Sands and Exxaro TSA Sands) to comply with Black Economic Empowerment (BEE) legislation. This interest may be exchanged for additional Class B Shares under certain circumstances, potentially increasing Exxaro's voting interest to approximately 41.7%.
- Debt Financing:
- Term Facility: On June 14, 2012, Tronox borrowed an additional $150.0 million under a Senior Secured Delayed Draw Term Loan (part of a $700 million facility with Goldman Sachs).
- UBS Revolver: On June 18, 2012, Tronox entered into a $300.0 million senior secured asset-based revolving credit facility with UBS AG, with an expansion option of up to $200.0 million. The borrowing base was in excess of $285.0 million at closing.
- Warrants: 841,302 warrants remain outstanding, exercisable for one Class A Share and $12.50 cash at prices of $62.13 (Series A) and $68.56 (Series B), expiring February 14, 2018.
Guidance, Outlook, and Risks
- Pro Forma Limitations: The pro forma financial statements are preliminary. Final acquisition accounting may differ materially due to valuation studies, share price fluctuations, and currency exchange rates. The statements exclude cost savings, revenue synergies, and restructuring costs expected from the transaction.
- Bargain Purchase Gain: A preliminary bargain purchase gain of approximately $1,284.4 million was recorded. This is a non-recurring item and was not reflected in the pro forma statement of operations.
- Regulatory Risks (South Africa): The 26.0% retained interest by Exxaro is subject to BEE requirements. If the South African Acquired Companies cease to qualify, remedial steps must be taken, potentially involving the warehousing of shares in a trust for disposal to a historically disadvantaged South African.
- Standstill Obligations: Exxaro is subject to a three-year standstill period, restricting it from acquiring beneficial ownership that would result in a voting interest of 45.0% or more.
- Transition Services: Exxaro will provide support services (HR, finance, supply chain, etc.) to Tronox for one to three years on an arm's-length basis.
Investor Verification Checklist
- Final Purchase Price Allocation: Verify the final fair value adjustments to assets and liabilities, as the current $1,284.4 million bargain purchase gain is preliminary.
- Debt Covenants: Review the specific covenants in the new UBS Revolver and Goldman Sachs Term Facility to ensure compliance with leverage and liquidity ratios.
- South African BEE Compliance: Monitor the status of the 26.0% retained interest and any potential triggers for the Put/Call Option or remedial actions required by the Department of Mineral Resources.
- Integration Costs: Assess the actual realization of cost savings and synergies, which are excluded from the pro forma results.
- Warrant Exercise: Track the exercise of the 841,302 outstanding warrants and their potential dilutive impact on future earnings per share.