Inco throws Falco a fin (May 22, 2006)

Inco (N-T, N-N) has boosted the cash portion of its friendly cash-and-scrip offer for Falconbridge (FAL.LV-T, FAL-N) by $5 per share, or around $1.9 billion. In all, the bid now totals just more than $19 billion.

The revised bid rings in at $51.17 in cash or 0.6927 of an Inco share accompanied by a nickel for each Falconbridge share. Still, it lags Falconbridge’s share price, which ended at $53.38 in Toronto on May 12, the day before the sweetened bid was announced.

Based on the available $4.8 billion in cash and 201 million shares, the offer boils down to $12.50 in cash and 0.524 of an Inco share for each of Falconbridge’s 372.3 million outstanding shares, assuming full pro ration.

With speculation swirling over the possibility of a competing bid for Falconbridge from major shareholder Xstrata (XSRAF-O, XTA-L), Inco and Falconbridge have also agreed to increase the break fee payable by Falconbridge should it accept a superior offer by US$130 million to US$450 million. Inco retains the right to match any offer.

That speculation has ratcheted up now that the top-up clause included in Xstrata’s acquisition of the bulk of its 20.01% stake in Falconbridge from the former Brascan. Xstrata paid Brascan, now Brookfield Asset Management (BAM.LV.A-T, BAM-N) around $2 billion for the shares.

Xstrata would have had to top up the compensation paid to Brookfield had it gone for the rest of Falconbridge’s shares at a price higher than its original price of $28 per share before May 15. At current prices, the penalty would have tipped the scales at around $2 billion.

Over the weekend, several media reports had JP Morgan and Deutsche Bank advising Xstrata with regard to a potential $19.9-billion bid for Falconbridge.

The sweetened deal also comes less than a week after Teck Cominco (TEK.SV.B-T, TCKBF-O) launched a hostile $17.8-billion bid for Inco.

Teck is offering $78.50 in cash or 0.9776 of one of its own class B subordinate voting shares plus a nickel for each Inco share. Assuming full pro ration, the offer equates to $28 in cash accompanied by 0.6293 of a class B share, with $6.36 billion in cash and 143 million shares up for grabs. The offer requires that Inco drop its bid for Falconbridge.

Teck’s bid for Inco increases the uncertainty of the Falconbridge deal, and makes the eventuality of an Xstrata bid all the more likely, as a bidding war would push Inco’s shares lower and leave it susceptible to Teck’s advances. That would also allow Xstrata to make its offer without breaking the bank. Xstrata says it’s still weighing its options.

Market dynamics

Inco CEO Scott Hand said the increased offer reflects the change in metal market dynamics and the additional value created in Falconbridge because of higher metal prices. It is not a response to a potential competing bid from Xstrata or Teck’s advances, he told analysts during a recent conference call.

Shares in Falconbridge are up nearly 60% in Toronto so far this year, thanks to higher metal prices and anticipation of a higher bid.

“No one should ever think that this non-offer from Teck is the exclusive alternative that our Inco board would look at,” Hand said. The board looked at a lot of alternatives, but came back to the Falconbridge acquisition as the best alternative for Inco shareholders, he said.

“Trying to deal with these phantom bids is not particularly helpful,” added Falconbridge CEO Derek Pannell during the joint call. “We have on Inco a very solid, tangible offer that is real, has real synergies of several billion dollars.”

Teck has yet to launch a formal bid for Inco, as it awaits delivery of Inco’s shareholder list. Thereafter, it will send its offer directly to shareholders. Hand said he’d abide by regulations and provide the list within 10 days.

Said Pannell: “The others have had a long time in which to bid, as we’ve gone through the regulatory process, and they’ve chosen not to do so.”

While higher metal prices obliged Inco to increase its offer, they have also boosted the estimated annual synergies the combination of the two companies is expected to yield. When it first launched its bid last October, Inco envisaged annual savings of around US$350 million, primarily through the streamlining of operations and better use of resources in the Sudbury basin. That number has since grown to US$375 million, owing to expected higher throughputs and commodity prices. Hand expects the synergies to fully kick in by mid-2008.

Hand said that Teck’s plan to rationalize Inco and Falconbridge’s Sudbury operations via a joint venture might realize a small fraction of his proposed savings, but it would not be able to maximize them and it would take much longer.

“Don’t lose sight of the fact that synergies in nickel are more difficult to realize than they are in other metals.” Hand said. “Only Inco and Falconbridge can unlock and maximize the enormous value of the synergies in the Sudbury basin.”

Hand also said that the estimated savings exclude potential significant synergies between projects outside the basin, like the Goro and Koniambo nickel-laterite projects in New Caledonia, and the Voisey’s Bay and Raglan nickel operations in eastern Canada.

In the end, Inco figures nickel production in the Sudbury basin could be boosted by as much as 60 million lbs. annually under its scheme.

Poaching

Having already crashed the wedding party, Teck also recently poached Falconbridge’s chief operating officer. Peter Kukielski will assume the roles of executive vice-president and chief operating officer at Teck beginning July 15. His responsibilities will include mining and metallurgical operations across all commodities, marketing and sales, and project engineering and management.

“I am delighted that Peter Kukielski is joining Teck Cominco,” said Teck CEO Don Lindsay in a statement. “Peter brings a wealth of strategic, operations, project management, as well as international experience to our company.”

The diversified miner also announced the retirement of its senior vice-president Michael Lipkewich after 36 years of service.

Falconbridge will immediately replace Kukielski with Ian Pearce. Pearce joined Falconbridge in August 2003 as senior vice-president of projects and engineering.

On the regulatory front, Hand says that nothing has changed since April. Ongoing talks are focused on Inco’s previously proposed remedy of selling off Falconbridge’s Nikkleverk refinery in Norway, thereby creating a viable competitor to the new Inco.

Hand expects the European Commission to deliver its verdict by late June or early July. The U.S. Department of Justice is expected to hand down its ruling before then.

Inco’s thrice-extended bid for Falconbridge expires at the end of June; the support agreement between the two expires on August 10.