Inco throws Falco a fin (May 15, 2006)

Inco (N-T, N-N) has boosted the cash portion of its friendly cash-and-scrip offer for Falconbridge (FAL.LV-T, FAL-N) by $5 per share or around $1.9 billion. In all, the bid now totals just more than $19 billion.

The revised bid comes in at $51.17 in cash or 0.6927 of an Inco share accompanied by a nickel for each Falconbridge share. Still, it lags Falconbridge’s share price, which ended at $53.38 in Toronto on May 12, the day before the sweetened bid was announced.

Based on the available $4.8 billion in cash and 201 million shares, the offer boils down to $12.50 in cash and 0.524 of an Inco share for each of Falconbridge’s 372.3 million outstanding shares, assuming full pro ration.

With speculation swirling over the possibility of a competing bid for Falconbridge from major shareholder Xstrata (XTA-L, XSRAF-O), Inco and Falconbridge have also agreed to increase the break fee payable by Falconbridge should it accept a superior offer by US$130 million to US$450 million. Inco retains the right to match any offer.

That speculation has ratcheted up now that the top-up clause included in Xstrata’s acquisition of the bulk of its 20.01% stake in Falconbridge from the former Brascan for around $2 billion has expired. Brascan is now Brookfield Asset Management (BAM.LV.A-T, BAM-N).

Xstrata would have had to topped up the compensation paid to Brookfield had it gone for the rest of Falconbridge’s shares at a price higher than its original price of $28 per share before May 15.

Over the weekend, several media reports had JP Morgan and Deutsche Bank advising Xstrata in regards to a potential $19.9-billion bid for Falconbridge.

Inco’s sweetened deal comes also less than a week after Teck Cominco (TEK.SV.B-T, TCKBF-O) launched a hostile $17.8-billion bid for Inco. Teck is offering $78.50 in cash or 0.9776 of one of its own class B subordinate voting shares plus a nickel for each Inco share. Assuming full pro ration, the offer equates to $28 in cash accompanied by 0.6293 of a class B share, with $6.36 billion in cash and 143 million shares up for grabs. The offer requires that Inco drop its bid for Falconbridge.

Inco CEO Scott Hand says the increased offer reflects the change in metal market dynamics and the additional value created in Falconbridge because of higher metal prices. It is not a response to a potential competing bid from Xstrata or Teck’s advances, he told analysts during a conference call.

“No one should ever think that this non-offer from Teck is the exclusive alternative that our Inco board would look at.” He said his board looked at a lot of alternatives, but came back to the Falconbridge acquisition as the best alternative for Inco shareholders.

“Trying to deal with these phantom bids is not particularly helpful,” added Falconbridge CEO Derek Pannell during the joint call. “We have on Inco a very solid, tangible offer that is real, has real synergies of several billion dollars.”

“The others have had a long time in which to bid, as we’ve gone through the regulatory process, and they’ve chosen not to do so.”

While higher metal prices necessitated an increased offer, it has also boosted the estimated annual synergies a combination of the two companies should generate. When it first launched its bid last October, Inco envisaged annual savings of around US$350 million primarily through the streamlining of operations and better use of resources in the Sudbury basin. Savings are now pinned at US$390 million a year owing to expected higher throughputs and commodity prices. Hand expects the synergies to fully kick in by mid-2008.

Hand said that while a joint venture in the basin might be able to realize a small fraction of the savings in the basin, it would not be able to maximize them, and it would take much longer.

Teck said that following its proposed acquisition of Inco it would be able to rationalize Inco and Falconbridge’s Sudbury operations without a common shareholder base.

“Don’t lose sight of the fact that synergies in nickel are more difficult to realize than they are in other metals,” Hand said.

“Only Inco and Falconbridge can unlock and maximize the enormous value of the synergies in the Sudbury basin,” Hand concluded.

He figures nickel production in the Sudbury basin could be boosted by as much as 60 million lbs. annually. The estimated savings do not include potential significant synergies between projects outside the basin like the Goro and Koniambo nickel-laterite projects in New Caledonia, and the Voisey’s Bay and Raglan nickel operations in eastern Canada.

On the regulatory front, Hand says that nothing has really changed since April. Talks are ongoing and focus on Inco’s previously proposed remedy of selling off Falco’s Nikkleverk refinery in Norway, and creating a viable competitor to the new Inco.

Hand expects the European Commission to deliver its verdict by late June or early July. The U.S. Department of Justice is expected to hand down its ruling before then.

Inco’s thrice-extended bid for Falconbridge expires at the end of June; the support agreement between the two expires on August 10

Shares in all three Canadian miners were off in a broader market decline. Inco was off $2.65 at $71.15, Falconbridge was $1.03 lower at $52.35, and Teck was $2.77 cheaper at $69.99 in late-afternoon trading in Toronto on May 15.