NorandaFalconbridge merger cheered

Vancouver — The latest in a string of mining mergers has Noranda (NRD-T) and Falconbridge (FL-T) joining forces to form a Canadian-based heavyweight in the global base metals sector. In a merger valued at more than US$14 billion, the two companies have agreed to a share exchange to bring about the creation of NorandaFalconbridge.

Noranda will acquire the 40% of Falconbridge’s shares it does not already own by offering 1.77 of its shares for each Falco share held. That represents a premium of 15% over Falco’s average share price over the last 20-day trading period. The merger is subject to a majority of Falconbridge’s minority shareholders’ tendering to the offer.

The other major component of the restructuring is a US$1.25-billion issuer bid by Noranda to re-purchase 63.4 million of its common shares in exchange for three series of preferred shares.

Brascan (BNN-T), which owns 41% of Noranda’s common shares, has agreed to tender all its common shares to the issuer bid, which is expected to be completed by the end of April. Brascan’s interest in the new company will be reduced to 16-26%, depending on the total number of shares tendered. Brascan says it has enough shares to satisfy the issuer bid if no other Noranda common shareholders tender to the bid.

Says Brascan CEO Bruce Flatt: “After reviewing a number of alternatives for our shares of Noranda in the context of an extremely positive outlook for base metals, we have decided to reduce our investment by up to fifty per cent and ride the expected future upside of the base metals business through our ownership of common shares in a combined NorandaFalconbridge. Upon completion of the merger, NorandaFalconbridge will be an extremely well-positioned base metals company.”

On the other hand, many believe Brascan sees the merger as a way to divest itself of its mining assets, which it has been trying to do for some time.

On March 9, the day the merger was announced, shares in Falconbridge closed up more than 3% at $40.40 on a volume of more than 10 million shares, whereas Noranda’s were off by 1.3% to $22.99 on more than 26 million shares.

Dominion Bond Rating Service has maintained its rating of “under review with developing implications” for Noranda. Dominion confirmed its ratings for Brascan and Falco, saying the transaction would be beneficial to Brascan as it would crystallize the value of up to 50% of its investment in Noranda and provide a higher yield from dividends from the preferred shares in Noranda.

However, Standard and Poor’s changed its CreditWatch rating for Noranda and Falco to “negative” from “developing,” following the merger announcement.

Both companies produce nickel and copper. Falco also produces cobalt and platinum group metals, and recycles metals. Noranda also produces zinc and aluminum.

Falconbridge has had a fuzzy corporate structure since 1988, when Superior Oil divested itself of Falconridge Nickel via the market and William James, then CEO of Falco, started shopping the company around.

Over the next five years, Falco was run as a private company by 50-50 owners Noranda and Trelleborg (which outbid Amax in 1989). By 1994, Trelleborg wanted out and persuaded Noranda to float a $1.4-billion public issue of Falco shares, leaving Noranda with a 46% stake and Trelleborg with 28%.

From then on, Falconbridge operated as a public company under Noranda’s effective control. Trelleborg gradually sold off its 28% while Noranda bought on the market until it owned 59%.

The two companies have integrated their corporate offices while keeping operating functions separate.

Meanwhile, Chinese-state owned China Minmetals has reportedly given up on its plan to buy Noranda, as announced last September, though Noranda President Derek Pannell says some kind of strategic alliance seems likely.

“China is a major consumer of our products, and they are keen to work with us,” he says. “In turn, we are looking to them to give us access to exploration opportunities in China, and an alliance would open up new prospects for NorandaFalconbridge.”