Teck ups bid for Inco

The widely anticipated bidding war for Inco (N-T, N-N) has begun, with Teck Cominco (TCK.B-T, TCK-N) boosting the cash portion of its bid just four days after the nickel miner failed in its attempt to gain control of Falconbridge (FAL-T, FAL-N).

Teck’s revised, fully pro-rated offer amounts to $40.00 in cash and 0.5821 of a class B share; the original bid rang in at $28.00 in cash plus 0.6293 of a share. The new bid values each Inco share at $82.50, and the entire company at $16.5 billion, based on Teck’s closing share price of $73.01 in Toronto on July 28 — the last business day before the unveiling of the new bid, which expires on Aug. 16.

Teck plans to fund the new bid out of cash on hand and a committed term loan. If successful, the new Teck would see its debt-to-capital ratio increase to 30% from 22%.

“We recognize that cash is highly desirable in these transactions,” Teck CEO Don Lindsay told analysts during a conference call to discuss the revised offer. He added that the decrease in shares available under the proposed scheme protects existing shareholders’ valuable currency — Teck Cominco shares.

The new offer follows Teck’s disciplined approach to the transaction, says Lindsay, noting that market speculation had Inco shares at more than $86.00 on July 28. He concludes that Teck’s bid of $82.50 per share is a “full and fair offer,” and that without competing bids, Inco’s shares would probably be trading at around $60.00 each.

While Teck says it will not be drawn into a bidding war, Lindsay would not confirm that the latest iteration was his company’s best and final offer.

“I can say it’s a very full offer — a very fair offer — and that we will only do what makes sense for Teck Cominco shareholders,” Lindsay said. “This makes sense for Teck Cominco shareholders; I’m not sure that much else would.”

Synergies out of a Teck-Inco union are pegged at a conservative US$150 million in the first year, with half of that to arise out of Sudbury, Ont. The company is also open to potential joint ventures in Sudbury aimed at realizing annual synergies of US$550 million previously proposed by Inco and Falconbridge.

Teck’s new offer includes $9.1 billion in cash (up 43% from the previous version) and up to 132.3 million shares (down 7.5%). Lindsay quashed speculation that he would consider eliminating his company’s dual share structure, instead saying that large institutional shareholders had been much more interested in a New York Stock Exchange listing, which the company now has. He said those investors understand that Teck’s B shares have outperformed Inco and Phelps’ similar shares.

Teck currently has two classes of shares — the A class shares carry 100 votes, while the B class have 1 vote. Temagami Mining is the largest holder of class A shares, with a 32% stake; Temagami is in turn owned 51% by the Keevil family trust, and 49% by Japan’s Sumitomo Metal Mining (STMNF-O). On July 19, Teck had more than 210.6 million class B shares and nearly 4.7 million class A shares outstanding.

Teck’s fully permitted bid is conditional on less than 62% of Inco’s shareholders, other than itself, handing in their shares. On July 21, Teck said some 1.35 million Inco shares had been tendered to its original offer.

Inco said it would advise its shareholders once it had evaluated the revised bid.

“Our revised offer represents a full value, and includes higher multiples than Xstrata’s bid for Falco,” Lindsay said. We think we are paying a full price for the growth that is in Inco. It’s here, it’s real, and it’s now.”

He concluded that in the end, if Inco shareholders decided to choose a different direction, Teck would wish them well, and then quickly move on to the many other interesting opportunities that have been awaiting the company’s undivided attention.

Teck’s bid faces competition from Phelps Dodge (PD-N), which is looking to salvage the remnants of its recently scuppered three-way deal with Inco and Falconbridge by acquiring Inco on its own.

Phelps is offering Inco shareholders $20.25 plus 0.672 of one of its own shares for each of their shares. The offer was worth $82.12, based on Phelps’ closing share price of US$81.50 in New York City on July 28.

Phelps’ plan however faces some resistance from major shareholders Atticus Capital and Lehman Brothers. The pair intends to vote against the proposed acquisition, believing it too dilutive and debt-laden.

The loss of Falconbridge from the mix also means that synergies generated by a union of Phelps and Inco would come in as a fraction of the US$900 million forecast under the three-way deal, making the acquisition of Inco even less attractive to Phelps’ shareholders.

Phelps’ shareholders will vote on the plan in September; the plan also requires approval by Investment Canada. Inco also needs at least two-thirds of its shareholders to approve the proposal.

Adding to the merger frenzy, recent rumours have Grupo Mexico (GMBXF-O, GMEXICOB-M) sniffing around Phelps. The Mexican mining conglomerate has reportedly hired a U.S. financial adviser to study a bid. An all-cash bid by Grupo Mexico trumped Phelps’ cash-and-scrip merger plan with Asarco in 2000. Market watchers have also touted Companhia Vale do Rio Doce (RIO-N), Anglo American (AAUK-Q, AAL-L) and Rio Tinto (RTP-N, RIO-L) as potential predators for Inco.

Under an earlier agreement with Teck, Inco’s shareholders’ rights plan expires on Aug. 16.

Meanwhile, Xstrata (XSRAF-O, XTA-L) wasted little time on a victory party, picking up more than 18.5 million new Falconbridge shares once Falco’s shareholders’ rights plan expired on July 28. The shares, purchased on the TSX, boost Xstrata’s stake to 24.5%. The company’s offer of $62.50 per Falconbridge share expires at 8 p.m. (eastern standard time) on Aug. 14.

Falconbridge said it would provide a formal recommendation to shareholders after reviewing the latest developments.

Caught in the crossfire of Inco’s failed advances toward Falconbridge is LionOre Mining International (LIM-T, LMGGF-O, LOR-L), which loses out on its deal to buy Falco’s high-grade Nikkelverk nickel refinery in Norway for US$650 million. The sale was contingent on Inco acquiring Falco, and was designed to allay competition concerns such a union would give rise to. Inco will now pay LionOre a US$32.5-million break fee. That will come out of a US$150-million expense fee Falco must pay Inco for failing to complete their merger; Falconbridge is on the hook for another US$300-million break fee should Xstrata complete its proposed acquisition.

In addition to losing its battle for Falconbridge at the midnight deadline on July 27, Inco also saw its Voisey’s Bay nickel mine in northern Labrador hit by a strike. The company and United Steelworkers representatives had been trying to hammer out the operation’s first labour pact.

Inco said that the strike, by about a quarter of the mine’s 420-strong workforce, would not affect finished nickel production as Voisey’s, which ships concentrate seasonally, had large quantities of concentrate on hand for shipping to the Sudbury and Thompson, Man., smelters.

Voisey’s Bay began producing in September, and churned out some 23 million lbs. nickel-in-concentrate and 10 million lbs. copper-in-concentrate during the balance of the year. The mine was expected to produce around 120 million lbs. of low-cost, high-grade nickel concentrates in 2006.

By mid-afternoon on Aug. 1, the gap between Teck and Phelps’ bids was $1.84, with Teck’s bid valued at $84.09 per share, and Phelps’, at $85.94. Phelps’ bid has benefited by rumours that it is now in play. Likewise, investors bid shares in Inco higher to $87.54 in anticipation of a sweeter bid.