Phelps troika circles the wagons (July 17, 2006)

Facing a recently sweetened competing bid, and a looming July 28 deadline for Falconbridge’s shareholders’ rights plan, Inco (N-T, N-N) has increased the cash portion of its offer for formal rival Falconbridge (FAL-T, FAL-N) by a $1.00.

Tearing a page out of Xstrata‘s (XSRAF-O, XTA-L) playbook, Inco boosted its friendly cash-and-share bid a few days after initially extending its existing bid by 11 days to July 24.

Inco’s revised bid includes $18.50 in cash, with the share exchange ratio unchanged at 0.55676 of an Inco share for each Falconbridge share. Inco also says it now needs only a simple majority of Falconbridge’s fully diluted outstanding shares to be tendered, down from the previous two-thirds. The offer has been extended a further three days to July 27.

Falconbridge’s board has unanimously recommended the new offer. To further entice shareholders it has unveiled a special dividend of 75 per share. The dividend will only go to those shareholders that retain their shares until at least July 26 — five days after Xstrata’s bid expires. The dividend is payable on August 10, and totals US$240 million. Xstrata stands to receive around 20% of that thanks to its existing stake in Falconbridge.

Meanwhile, Inco’s increased bid comes compliments of a richer bid from Phelps Dodge (PD-N), which has offered up another $2.75 per Inco share, to bring its bid to $20.25 in cash accompanied by 0.672 of one of its own shares. The pair has also amended its merger agreement to allow for their combination prior to Inco acquiring 100% of Falconbridge.

The trio’s new scheme comes on the heels of the European Commission’s approval of Xstrata’s all-cash bid for the 80.2% of Falco shares it doesn’t already own.

Said the commission in a prepared statement: “After examining the operation, the commission concluded that the transaction would not significantly impede effective competition in the European economic area or any substantial part of it.”

The regulator concluded that the proposed union would result in limited overlap in the mining, processing and sales activities of Falconbridge, Xstrata and major Xstrata shareholder Glencore International. Glencore owns a 14.3% stake in Xstrata.

Xstrata’s sweetened bid of $59 per share still requires approval by Investment Canada. That approval could take until early August after the regulatory body recently decided it need more time to fully consider the implications of Xstrata’s hostile bid.

Xstrata’s bid expires on July 21; the Swiss-based miner says it is confident that it will receive the necessary clearance under the Investment Canada Act. Inco’s bid was approved by the EC on July 4. Phelps’ three-way plan needs to be approved by the European Commission and its own shareholders. Meanwhile, Teck Cominco (TCK.b-T, TCK-N) remains on the sidelines with its bid for Inco remaining at $28 in cash plus 0.6293 of one of its class B shares. The Ontario Securities Commission will hear Teck’s petition to have Inco’s shareholders’ rights plan struck down on July 21. Teck argues that there is no need for the plan as an auction for the company has already occurred.

Another important date to circle is July 28 — the expiry of Falconbridge’s shareholders’ rights plan. The plan currently prevents Xstrata from picking up additional Falco shares on the open market, as doing so would trigger a massive dilution of its existing 19.8% stake, and make acquiring the remaining outstanding shares prohibitively expensive. Once the poison pill expires, Xstrata can freely acquire shares, and potentially amass a stake large enough to block Inco’s bid.

Shares in Falconbridge were 50 higher at $61.50 in late-afternoon trading in Toronto on July 17; Inco was 76 better at $75.65. In New York, Phelps was off US$2.84 at US$76.95. For its part, Teck was 31 cheaper at $66.90.