Phelps Dodge boosts bid for Asarco and Cyprus

In a bid to become the world’s largest copper producer, Phelps Dodge (PD-N) has boosted the value of its previously announced offers to acquire Asarco (AR-N) and Cyprus Amax Minerals (CYM-N).

The revised offers include a substantial cash component and would provide shareholders of Asarco and Cyprus Amax with premiums of about 40% on recent share prices. At presstime, Asarco refused to comment on the revised takeover bid, which is clearly designed to thwart its own plans for a merger with Cyprus Amax.

In mid-July, Asarco and Cyprus announced plans for a “merger of equals,” which would result in the creation of the largest publicly traded copper company in the world. The new entity, to be named Asarco Cyprus, would produce 2 billion lbs. copper annually — second only to Chile’s state-owned Corporacion Nacional del Cobre (Codelco). Asarco Cyprus would have reserves of 62 billion lbs. copper and produce at US50 cents per lb., and the merger would create cost savings estimated at more than US$150 million per year.

Shareholders of Asarco and Cyprus will meet Sept. 30 to decide whether to accept the proposed 2-way merger or nix the deal in favour of a 3-way merger with Phelps Dodge.

Phoenix-based Phelps Dodge is proposing to incorporate both Asarco and Cyprus in a 3-way merger, thereby creating a company with production of 3.8 billion lbs., surpassing Codelco. The proposed company would have reserves of 82 billion lbs. copper and, like the proposed Asarco Cyprus, produce at US50 cents per lb.

Phelps Dodge initially offered 0.4098 share for each share of Asarco, and 0.3135 share for each share of Cyprus. Asarco and Cyprus countered this offer with a US$5-per-share dividend designed to persuade shareholders to accept the 2-way deal, and asked Phelps Dodge to postpone its takeover offer until the deal is complete. They also asked Phelps Dodge to increase the share exchanges to 0.53 Phelps Dodge share for each Asarco share and 0.4055 share for each Cyprus share, making the latter deal a so-called merger of equals similar to the Asarco Cyprus transaction.

At first, Phelps Dodge refused to alter its original proposal, calling Asarco’s and Cyprus’s counter-offer “so unreasonable that their sincerity is questionable.”

However, at presstime, the copper giant boosted its bid for shares of Asarco to US$9 in cash and 0.288 Phelps Dodge share per Asarco share on a fully pro-rated basis. It boosted its bid for shares of Cyrpus Amax to US$6.89 in cash and 0.2203 Phelps Dodge share per Cyprus Amax share on a fully pro-rated basis.

Shareholders of both companies will have the right to elect to receive all cash or all Phelps Dodge shares (at 0.4413 Phelps Dodge share per Asarco share and 0.3376 Phelps Dodge share per Cyprus Amax share). The stock portion will be tax-free to shareholders of both companies.

Douglas Yearley, chairman of Phelps Dodge, says the Asarco and Cyprus Amax shareholder votes on Sept. 30 “will be a clear-cut referendum.”

He adds: “If shareholders approve the two-way, no-premium merger, we will immediately withdraw our clearly superior offers and will not bid further. It is now time for Asarco and Cyprus Amax to come to the table.

“With their co-operation, we will be in a position to close this compelling, three-way merger immediately following the October 13 Phelps Dodge shareholderholder meeting.”

The revised offer values Asarco at US$25.47 per share, or a total equity value of US$1.01 billion, based on 39.8 million Asarco shares outstanding. And it values Cyprus Amax at US$19.49 per share, or a total equity value of US$1.76 billion, based on about 90.5 million Cyprus Amax shares outstanding.

Phelps Dodge expects to finance the approximate US$1-billion cash portion of the offers through existing credit facilities and cash on hand.

The takeover attempt has generated two lawsuits to date. Asarco recently filed suit against Phelps Dodge, claiming that its takeover attempt interferes with the proposed merger with Cyprus Amax and violates federal anti-trust laws.

Phelps Dodge previously initiated litigation against Asarco and Cyprus, alleging breach of “fiduciary duties by impermissibly prohibiting directors from informing themselves of any third-party proposal.”

Asarco’s suit centres on the issue of anti-trust approval. Under the Hart-Scott-Rodino Anti-trust Act, Asarco and Cyprus already have regulatory approval for the proposed 2-way deal, and they claim that the 3-way deal proposed by Phelps Dodge “would create the very sort of market dominance that the nation’s anti-trust laws were enacted to prevent.”

According to Asarco, the 3-way deal would have 80% of U.S. copper mining capacity, 58% of the nation’s smelter capacity, 69% of the refining capacity, 78% of the commercial copper rod capacity and 97% of the solvent extraction-electrowinning capacity.

The Asarco Cyprus merger would consolidate much of the copper industry in the southwest into two companies, whereas the merger with Phelps Dodge would consolidate it into one company. The only significant remaining copper producers in the U.S. would be Kennecott, a division of London-based Rio Tinto (RTP-N), and Australia’s Broken Hill Proprietary (BHP-N), which closed all its copper operations in the region in May.

Phelps Dodge dismisses Asarco’s lawsuit as being without merit, and remains confident regulatory approval for the 3-way deal will be received.

Proxy statements were sent to Asarco and Cyprus shareholders in preparation for the Sept. 30 special meeting. Asarco requires more than half of the votes in order for the merger to be approved, whereas Cyprus requires approval of a majority of the outstanding shareholders.