Inco, Falco close ranks to foil Xstrata bid

In a move designed purely to bolster support for an Inco (N-T, N-N) and Falconbridge (FAL.LV-T, FAL-N) union rather than a marriage between the latter and Swiss metals titan Xstrata (XTA-L), Inco says its bid would result in pretax “synergies” of US$550 million, up from the US$200 million estimated in the original takeover bid made in late 2005.

Inco and Falconbridge personnel attribute the improved synergies to changes in the Inco-Falconbridge integration plan and better prices for base metals, especially nickel and copper.

Inco claims the net present value of annual synergies of US$550 million, using a discount rate of 7%, is equivalent to about US$3.5 billion on an after-tax basis.

Meanwhile, following a similar pattern, Falconbridge’s board of directors says it has assessed the competing offer by Xstrata to acquire the outstanding shares of Falconbridge and says the offer is not a “superior proposal” under the terms of a support agreement signed with Inco. Falconbridge will tell shareholders to tender their shares to Inco in a mailing to be sent shortly.

Xstrata’s offer of $52.50 per share trumps Inco’s recently increased cash-and-share bid of $51.17 or 0.6927 of one of its own shares accompanied by a nickel. In all, Xstrata’s bid values Falconbridge at around $20 billion, whereas Inco’s friendly offer rings in at slightly more than $19 billion.

“Clearly, one of the strengths of the Inco offer is that it gives Falconbridge shareholders almost 50% participation in the growth of the new Inco, a company that would have one the best portfolios of development projects in the base metals industry at a time when the fundamental outlook is so positive,” says Derek Pannell, Falconbridge’s chief executive officer.

The Falco board dismissed Xstrata’s offer based partly on its conditions, including the necessary approval of Xstrata shareholders — which won’t come until the end of June at the earliest — and an endorsement from Investment Canada.

The Inco-Falco merger must still clear some hurdles with the European Commission and the U.S. Securities and Exchange Commission.

Also noteworthy, says Falconbridge, is that while Xstrata’s bid is thought to be for all Falconbridge shares, Xstrata has reserved the right to take up any number of shares tendered. Given that it currently holds roughly 20% of Falconbridge, even a small number of shares tendered could well result in Xstrata acquiring effective control of Falconbridge.

For its part, Inco is busy fending off a hostile takeover by Vancouver-based diversified miner, Teck Cominco (TEK.B-T).

Teck has offered $28.00 per share plus 0.6293 of Teck share for Inco. The unfriendly deal amounts to $17.8 billion.

Inco’s board has unanimously recommended that shareholders reject Teck’s unsolicited offer, claiming that the proposal is “opportunistic, inadequate and contrary to the interests of Inco shareholders.”

“(The offer is) an opportunistic and calculated attempt to grab Inco at a bargain basement price when we are focused on completing our Falconbridge transaction,” says Inco chairman and CEO Scott Hand. “Teck appears to hope that our board will be constrained by our Falconbridge transaction from exploring alternatives to the transaction in the event it were not completed.”

He added: “We are confident that Inco shareholders will see through Teck’s manoeuvre and reject its inadequate offer.”

Hand maintains that his company’s friendly bid for Falconbridge is the best bet to generate “strong shareholder value.”