Phoenix-based Phelps Dodge Corp. took a shine to nickel on Monday, announcing a $40 billion deal to acquire two Canadian metal producers and become a bigger global player in mining.
The cash and stock offer for Inco Ltd. and Falconbridge Ltd. will create a "powerhouse," said Phelps Dodge CEO J. Steven Whisler, that will be the world's largest producer of nickel and the largest publicly traded copper company.
Inco and Phelps Dodge, one of Southern Arizona's biggest employers, have said they expect no regulatory problems, though some union and political opposition to the three-way transaction surfaced in Canada.
Analyst reaction was mixed, and Phelps Dodge shares dropped 8 percent Monday on the news.
The transaction is expensive "from a Phelps Dodge shareholders perspective," Credit Suisse analyst David Gagliano said today in a report. He has an "outperform" rating on Phelps shares. "The least expensive company in our base-metal universe is paying a premium to acquire the most expensive."
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Gagliano said the offer values Inco at 11.1 times the company's estimated earnings per share for this year and 10.9 times 2007 earnings. Phelps Dodge shares on June 23 traded at 5.4 times 2006 earnings and 4.7 times 2007 earnings, he said.
Phelps Dodge shares fell $6.72, or 8.1 percent, to close at $76.23 in New York Stock Exchange composite trading, the biggest one-day decline since Oct. 13, 2004. The shares have rallied 66 percent in the past year.
Inco shares closed at $72.28, up $7.03, while Falconbridge shares rose $2.50, or 5.1 percent, to finish at $51.80 on the New York Stock Exchange.
Two other bids
If the offer is approved, Phelps Dodge would have thwarted two other bids.
Inco originally announced a deal to buy Falconbridge last October. As the companies sought regulatory approval, both received alternative bids: Vancouver-based Teck Cominco Ltd.'s bid for Inco and the Swiss mining company Xstrata PLC's for Falconbridge. The offer from Phelps Dodge, which has board approval from all three companies, puts a premium on the prices of both companies.
"In the copper industry, being able to control more supply and having a greater amount of the asset under the management of Phelps Dodge should be better in terms of market power for the firm," said Osman Arain, a fund manager at New York-based Clear Asset Management LLC, which owns Phelps Dodge shares. "This to me looks like a sound business decision."
The combined companies will be known as Phelps Dodge Inco, with headquarters in Phoenix and Whisler remaining at the helm as chairman and CEO. The new company would operate in 40 countries and have 40,000 employees worldwide. Phelps Dodge alone has about 13,500 employees.
Inco Nickel will be based in Toronto, with Inco CEO Scott Hand as vice chairman, while Falconbridge CEO Derek Pannell will become president of Inco Nickel. The new company would be listed on the NYSE and also plans to apply for a listing on the Toronto exchange.
Shareholder and regulatory approvals are needed for the transaction, which the companies hope to complete by September.
PD No. 10 in Star 200
Phelps Dodge Mining Co. ranked as the No. 10 employer in Southern Arizona with 4,123 full-time-equivalent workers, according to the 2006 Star 200 survey. The company operates copper mines near Green Valley, in Morenci and Miami, and plans to open a $550 million mining project in Safford within two years.
"We're extremely excited about the powerhouse we're creating," said Phelps Dodge CEO Whisler. "The transaction we announced this morning is clearly transformational. Our key driver in this transaction is the potential for significant synergies."
Under terms of the deal, Inco shareholders will receive 0.672 shares of Phelps Dodge stock plus $15.59 per share in cash for each share of Inco stock, representing a premium of 23 percent over Inco's price on Friday.
Inco in turn will increase its offer for Falconbridge to 17.50 Canadian dollars, or $15.59 in U.S. dollars, from 12.50 Canadian dollars and the exchange ratio to 0.55676 shares of Inco, from 0.524 shares, for each share of Falconbridge.
Based on Phelps Dodge's offer for Inco the value of Inco's increased offer for Falconbridge is 62.11 Canadian dollars ($55.34), or a 12 percent premium to Falconbridge's price Friday.
"I know our cultures are compatible and our people will be treated with respect," Falconbridge CEO Pannell said.
'Not a done deal'
The most vulnerable part of the deal is the portion involving Falconbridge, Linda Varoli of Wall Street Access said. Phelps Dodge has said the Inco deal is not contingent on the closing of the one with Falconbridge. The Phelps Dodge offer for Falconbridge represents an 18 percent premium over the bid from Xstrata.
"We don't know what Xstrata is going to do yet," Charles Bradford of Soleil-Bradford Research said, noting that Xstrata has accumulated a 19.8 percent stake in Falconbridge. "They have very deep pockets. This is not a done deal by any means."
The chief financial officer of Phelps Dodge, Ramiro Peru, said the company had arranged $22 billion in financing, which he said will be sufficient to close the transaction. Phelps Dodge also plans a $5 billion share buyback to be completed within 12 months after the deal closes.
The deal is expected to close in September with Phelps Dodge shareholders owning about 40 percent of the combined company, Inco shareholders with 31 percent, and Falconbridge holders with 29 percent.