Recapitalization plan strengthens Inco stock

Investors reacted positively to a recapitalization plan by Inco Ltd. (TSE) involving a rights plan and special dividend after shareholders of the nickel giant voted their approval.

Prices of the company’s common shares on the Toronto Stock Exchange rose 13 to $39.50 on almost 800,000 shares by the end of day of the special Toronto meeting which attracted 400-500 people. Of the more than 75 million shares represented at the meeting, 72% were voted in favor of the plan, which includes a one-time special dividend of $10(US) for common shareholders.

On the first full day of trading after the meeting, the share price dropped 13 with almost 1.4 million shares changing hands. Prices of the shares had risen steadily from $33.75 since the Oct 3 announcement by Inco of the plan.

Central to the vote was a rights plan or “poison pill” provision which would attempt to block, but not prevent, a takeover bid for the mining giant which produces about 35% of the world’s nickel.

There has been no news of a control bid for Inco. However, management argued that in the event of a takeover attempt, shareholder protection is required to see that an offer of fair value is made to all shareholders. Lawsuit launched

Opposition to the rights plan was voiced almost immediately after the initial Inco announcement. And, just days before the special meeting, the Caisse de Depot et Placement du Quebec, which holds about 3% of the common stock of Inco, filed a lawsuit in the Quebec Superior Court in Montreal which, if it proceeds, could be before the courts for several years.

Inco Chairman Donald Phillips said his company believes there is nothing illegal about the rights plan and intends to fight the lawsuit.

Phillips also said management decided to bring the recapitalization plan before shareholders for a vote although no such approval was needed.

Inco has close to 106 million shares outstanding and the special dividend payout will cost the company more than $1 billion(US). Phillips said more than 50% of the shares are held by U.S. interests, with Canadians holding more than 40%. About 70% of the outstanding shares are controlled by institutions, with the balance held by about 25,000 small investors.

Fear of a “street sweep” in the U.S. (and possibly in Canada) by a number of institutions, amounting to a takeover of the company and affording no protection for individual shareholders, motivated management to introduce the rights plan, Phillips said. Hostile bidders

The main point of Inco’s poison pill is to make it overly expensive for a “hostile” person or group seeking to acquire a minimum 20% interest in the company. Under the provision, shareholders may buy additional stock in the company at a discount of 50% if the board of directors does not approve of the hostile bidder. The hostile buyer seeking control of Inco could not claim the rights plan for his own use. The rights plan will expire Oct 3, 1998, unless terminated earlier.

Although common in the U.S., Inco’s rights plan is the first in Canada and analysts predict other Canadian businesses will soon be following suit.

Another mining company, Pegasus Gold (TSE), of Spokane, Wash., recently stated its intention to incorporate a poison pill provision among its policies. The Pegasus proposal is not tied to a special dividend and would allow company shareholders to vote on a takeover bid should a circular offer involving all shareholders be made.

Among those opposing the Inco plan was William Allen of the Toronto brokerage firm Allenvest Group, who objected to Inco linking the special dividend with the rights plan in a single vote. Allen said the strategy “is coercive to me and other shareholders and a dangerous precedent for Can adian shareholders.”

In answer to another shareholder’s comments, Phillips said the rights plan is not an entrenchment of management and denied the special dividend is a bribe. Higher metals prices

Higher prices for nickel and other base metals this year have made a substantial impact on the company’s balance sheet, with Inco earning $516 million(US) after only the first nine months of 1988, more than in any prior year in the company’s history.

Payment of the special dividend will be financed with cash on hand and about $500 million(US) of borrowed funds, which will increase Inco’s debt to about $1.25 billion.

According to Phillips, the company considers a debt/equity ratio of 40%/60% to be an appropriate level. While that ratio will obviously be affected by the new borrowings, he said that if nickel averages $4(US) per lb in 1989, that ratio will be at 50/50 by the end of that year, and even back to 40/60 should nickel average $5 per lb next year. (Nickel has been averaging more than $6 per lb this year.)

The special dividend will be payable to shareholders of record as of Dec 22 and will be paid Jan 9, 1989. The special dividend is in addition to the regular quarterly dividend of 20 (US) paid by the company.

Also approved at the special meeting was an employee share award program designed to broaden employee ownership in the company. Deferred by the company was a previously announced offering of $265 million principal amount of 12-year variable rate subordinated debentures (nickel notes).