Inco-Falco union tipped, Xstrata tripped (July 10, 2006)

The European Commission has granted approval for Inco’s (N-T, N-N) proposed acquisition of Falconbridge (FAL-T, FAL-N) after agreeing to the pair’s recently inked deal to sell Falco’s high-grade Nikkelverk nickel refinery in Norway.

In early June, Inco and Falco agreed to sell Nikkelverk to LionOre Mining International (LIM-T, LMGGF-O, LOR-L) for US$650 million in an attempt to ease competition concerns among regulators. The Commission agreed that the transaction would result in LionOre becoming an “independent, viable, and competitive player in the nickel and cobalt markets.”

“In this particular case, I am satisfied that the remedies will allow the emergence of a fully fledged competitor and at the same time, preserve competition in the nickel and cobalt markets,” said EC commissioner Neelie Kroes.

Said Inco CEO Scott Hand: “We are pleased with the conclusion of the Commission’s second-phase review and its clearance of the combination of Inco and Falconbridge. With this final clearance behind us, we can now move forward with our offer to acquire Falconbridge.”

Nikkelverk has an annual capacity of around 85,000 tonnes refined nickel, 39,000 tonnes refined copper plus cobalt, platinum group metals, gold and silver. The package also includes marketing and custom feed organizations that market and sell the refinery’s finished nickel and other products. The offices in Brussels, Tokyo and Pittsburgh arrange third-party feed for the facility.

To ensure LionOre’s competitiveness, Inco would continue to supply 60,000 tonnes of nickel-in-matte annually to the refinery over 10 years.

LionOre will cover the purchase price with US$400 million in cash, accompanied by 49.1 million shares. The newly minted shares would give the enlarged Inco an 18.4% stake in LionOre.

The Nikkelverk remedy was recently approved by the U.S. Department of Justice. The sale still hinges on Inco acquiring a controlling stake in Falconbridge. Assuming it does so, Inco has further agreed to be snapped up by Arizona-based copper producer Phelps Dodge, (PD-N) culminating a three-way merger valued at around US$40 billion. The latter scheme does not require that Inco acquire Falconbridge, but did allow Inco to sweeten its bid for Falconbridge. The revised offer expires on July 7.

Meanwhile, Xstrata’s (XSRAF-O, XTA-L) competing bid for the 80% of Falconbridge it doesn’t already own has hit a pair of speed bumps. Industry Canada recently said it would extend its review for up to 30 days (until early August), and the Swiss-based miner also lost out on its appeal of Falconbridge’s shareholders’ rights plan.

The bid suffered another setback after the Ontario Superior Court dismissed Xstrata’s application to force Falconbridge to call an early annual general meeting to put its renewed shareholders’ rights plan to a vote. The meeting remains slated for no later than Oct. 9. The Ontario Securities Commission (OSC) subsequently quashed Xstrata’s request to have the poison pill immediately terminated. The OSC ruled that the plan will stand until either Xstrata acquires a majority of the outstanding shares of Falconbridge it does not already own or July 28.

Xstrata’s bid is not permitted under Falco’s rights plan as it contains a clause reserving the right to acquire some, but not all, of Falconbridge’s shares. The clause would allow Xstrata to acquire just enough shares to block Inco’s bid. Conversely, Inco’s permitted bid targets all outstanding shares.

Xstrata’s bid was scheduled to expire on July 7. It was recently approved by its shareholders but still needs a nod from the EC, as does Teck Cominco’s (TCK.B-T, TCK-N) rival bid for Inco.

The EC is expected to deliver verdicts on the rival bids by July 13 and July 7, respectively. Teck’s bid expires on July 24, and further requires that Inco scrap its planned acquisition of Falconbridge.