Phelps troika circles the wagons (July 24, 2006)

Facing a recently sweetened competing bid, and looming July 28 deadline for Falconbridge’s (FAL-T, FAL-N) shareholders’ rights plan, Inco (N-T, N-N) has increased the cash portion of its offer for its formal rival by $1.00.

Tearing a page out of Xstrata’s (xsraf-o, xta-l) playbook, Inco boosted its friendly cash-and-share bid a few days after initially extending its existing bid by 11 days to July 24.

Inco’s revised bid includes $18.50 in cash, with the share exchange ratio unchanged at 0.55676 of an Inco share for each Falconbridge share. The company says it now needs only a simple majority of Falconbridge’s fully diluted outstanding shares to be tendered, down from two-thirds. The offer has been extended another three days to July 27.

Falconbridge’s board has unanimously recommended the new offer, and has unveiled a special dividend of 75 per share to further entice shareholders not to tender to Xstrata. The dividend will only go to those shareholders that retain their shares until at least July 26 — five days after Xstrata’s bid expires. The dividend is payable on Aug. 10, and totals US$240 million. Xstrata stands to receive around 20% of that, thanks to its existing stake in Falconbridge.

When questioned during a conference call with analysts and media, Inco chief executive Scott Hand wouldn’t confirm if the latest offer was his company’s best and final offer.

“It’s a hell of a good offer,” he responded. “I would urge the Falconbridge shareholders to get on the bandwagon and move on.”

Hand said Falconbridge shareholders should tender by July 27 or face the “risks” involved in waiting until their company’s shareholders’ rights plan expires a day later.

“We intend to succeed, and this offer should do it,” he concluded.

Added Falconbridge CEO Derek Pannell: “The simple arithmetic of the transactions clearly adds up to a compelling and superior offer for Falconbridge shareholders.”

Additionally, Pannell said the true value of the offer is that it allows Falconbridge shareholders to participate in the leading North American metals mining company.

Richer bid

Inco’s increased offer comes compliments of a richer bid from Phelps Dodge (PD-N), which has offered up another $2.75 per Inco share, to bring its bid to $20.25 in cash accompanied by 0.672 of one of its own shares. The pair has also amended its merger agreement to allow for their combination prior to Inco acquiring 100% of Falconbridge.

“We’re even more confident about our views on synergies, our understanding of the operating plans of Inco and Falco, and for our strategy to derive superior financial performance than we were when we announced this transaction some three weeks ago,” said Phelps CEO Steven Whisler.

During the three weeks since the announcement of the proposed three-way deal, Whisler said his company spent additional time at the operations of Inco and Falconbridge, and confirmed its view of the financial attractiveness of the combination.

Still, Phelps has encountered resistance from some of its shareholders who worry the deal carries with it too much debt. The increased offer alone adds an additional US$1.67 billion in debt, to bring the grand total to nearly US$24 billion.

Whisler remains confident his shareholders will support the increased bid, and said that many major shareholders were starting to come around to the idea of the proposed merger. He admitted that the bid had caught some shareholders off guard, but added that his group had to act.

“It was unexpected, it was big and bold, and it was complex,” Whisler said.

“We cannot drive the timing of when world-class assets, such as Inco and Falconbridge, become available as potential combination partners,” he added. “We had to act opportunistically and quickly to create tremendous potential long-term value for our shareholders.”

Still, Phelps shareholders punished their company by sending shares down more than 3.5% in New York following the news.

Phelps’ three-way scheme will be put to a shareholder vote in September. The company is on the hook for a break fee of up to US$125 million if its shareholders balk at the proposal. The scheme also requires clearance by Canadian and European regulators.

All three executives sought to allay concerns that the transaction was being done amid a frenzy of soaring metal prices. They countered that the price assumptions employed in evaluating the planned transaction are very conservative, and the cash savings expected under the union would help offset any decline in metal prices.

So far this year, imports of copper in China — whose voracious appetite has been the main driver behind the latest renaissance in resources — have declined by 40%. Whisler sees this as a temporary situation, as the Chinese economy and copper consumption remain strong. He says the reduction in imports in part reflects the release of a significant amount of copper by China’s State Reserve Bureau, a portion of this into the market. Whisler expects that once this “de-stocking” in the Chinese market is over, very strong demand will resume.

“Nickel and copper are the best metals or materials around,” added Hand, who says the two metals have the best prospects going forward. “Supply will chase demand for some time to come in both metals.”

The trio’s revision to its planned three-way union follows the European Commission’s recent approval of Xstrata’s all-cash bid for the 80.2% of Falco shares it doesn’t already own.

“After examining the operation, the commission concluded that the transaction would not significantly impede effective competition in the European economic area or any substantial part of it,” said the commission in a statement.

The regulator concluded that the proposed union would result in limited overlap in the mining, processing and sales activities of Falconbridge, Xstrata and major Xstrata shareholder Glencore International. Glencore owns a 14.3% stake in Xstrata.

August decision

Xstrata’s sweetened bid of $59.00 per share still requires approval by Investment Canada. That approval could take until early August as the regulatory body recently decided it needed more time to fully consider the implications of Xstrata’s hostile bid.

Xstrata’s bid expires on July 21; the Swiss-based miner says it is confident that it will receive the necessary clearance under the Investment Canada Act. Inco’s bid was approved by the EC on July 4.

Meanwhile, Teck Cominco (TCK.B-T, TCK-N) remains on the sidelines with its bid for Inco remaining at $28.00 in cash plus 0.6293 of one of its class B shares. The Ontario Securities Commission was scheduled to hear Teck’s petition to have Inco’s shareholders’ rights plan struck down on July 21. Teck argues that there is no need for the plan as an auction for Inco is already under way.

Based on closing share prices on July 17, Inco’s bid for Falconbridge slightly edged out Xstrata’s $59.00 cash bid, ringing in at $60.62; Phelps’ offer valued each Inco share at around $78.79, compared with Teck’s offer, which came to $70.10. Falconbridge shareholders still expect an even sweeter offer to emerge, pushing the company’s shares to a close of $61.50 in Toronto on July 17.

Many market watchers anticipate Xstrata upping and extending its bid past the expiry date of Inco’s offer to allow Falconbridge shareholders to receive the special dividend and subsequently tender to its offer. If it were successful in its bid, Xstrata would then also have to absorb around US$192 million in dividend payments in addition to a US$450-million break fee payable to Inco.

Some analysts suggest Xstrata could bump its offer as high as $65.00 per share to emerge the outright winner. That would see the company’s weighted average cost of acquisition settle out at $57.67 per share, when factoring in its existing 19.2% stake. The company acquired its existing 73 million Falco shares from Brookfield Asset Management (BAM.A-T, BAM-N), formerly Brascan, f
or $28.00 per share, or around $2 billion.

Falconbridge’s shareholders’ rights plan currently prevents Xstrata from picking up additional Falco shares on the open market, as doing so would trigger a massive dilution of its existing stake, and make acquiring the remaining shares prohibitively expensive.

Once the poison pill expires, Xstrata can freely acquire shares, and potentially amass a stake large enough to block Inco’s bid. However, this is a little less likely now that Inco is willing to take up less than two-thirds of Falco’s shares.

In other news, Inco bumped up the release of its second quarter results by six days to July 19. Investors will now get a look at Inco’s financial results and outlook for the balance of the year before Xstrata and Teck’s bids expire.

Shares in Falconbridge ended 50 higher at $61.50 in Toronto on July 17 — the first business day following the news; Inco was 76 better at $75.65. In New York, Phelps was off US$2.84 at US$76.95. For its part, Teck was 31 cheaper at $66.90. Xstrata slid 3.7% to 1,986 pence in London.