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Phelps Dodge Corp. <PD.N> on Monday said it would
acquire Canada's Inco Ltd. <N.TO> and Falconbridge Ltd. for about
$40 billion in a blockbuster deal to create the world's largest nickel
miner and largest publicly-listed copper producer.
Phelps Dodge offered C$80.13 per share in cash and stock for Inco, a
premium of more than 10 percent at Monday closing prices, in a deal
that will raise its debt significantly.
It said the combined company would be the world's fifth-largest miner
by enterprise value.
Inco, which has already agreed to buy Falconbridge, in turn raised its
offer for Falconbridge to the equivalent of C$62.11 per share, a
premium of about 6 percent.
Dealogic described the plan as a record for the mining sector. Shares
of Inco and Falconbridge rose, while Phelps stock fell. Nickel prices
<MNI3> rose as markets speculated that the new firm would be
better able to smooth price fluctuations.
"The new company will have greater control of copper, nickel and
molybdenum production. This means they may be able to smooth out
cyclical price variations," said UBS analyst Robin Bhar. "Both
companies were swift to cut back production when prices were at their
lows in 2001. They may also be able to fast-track projects when prices
rise."
At least one analyst pointed out that the price infers that Phelps
believes metal prices will stay strong. Chief Executive Steven Whisler
indicated the assumptions were prudent.
"We look at the fundamentals, they are very strong. We do not see any
reason for softening of the markets," he said.
OTHER BIDDERS
Both Inco and Falconbridge <FAL.TO> already faced unsolicited
bids, Inco from Teck Cominco Ltd. <TEKb.TO> and Falconbridge from
Xstrata Plc. <XTA.L>. A source familiar with the Xstrata case
said the Swiss-based firm had no intention of abandoning its bid.
"I'm not quite sure why they wouldn't have tried to structure something
with Xstrata. Presumably they did and they couldn't get a deal done;
that to me would have made more sense than doing something with Phelps
Dodge," said Haywood Securities analyst Kerry Smith.
"At least there you would have fewer regulatory hurdles than I think
you will have with this transaction."
Teck Cominco said it would review the news and would have something to
say "in the near future."
The Phelps Dodge/Inco/Falconbridge deal will have to be approved by
Canada's federal Industry Ministry over the next 45 or 75 days. The
ministry declined to comment, but Phelps and Inco said it did not
expect any antitrust issues.
"I don't think we will see that on the copper side, because the copper
industry is very different from the nickel industry," said Inco Chief
Executive Scott Hand, whose offer for Falconbridge has been delayed
three times over competition concerns. "You don't have the
concentrations there that regulators saw in the nickel industry."
$900 MLN SYNERGIES
The companies forecast combined cost savings of $900 million a year by
2008. They said the deal, expected to close in September, would add to
cash flow immediately and boost earnings from 2008.
The combined Phelps Dodge Inco Corp. would be based in Phoenix, where
Phelps Dodge is headquartered, with the new Inco Nickel division run
out of Toronto.
Phelps Dodge's Whisler would be chairman and CEO and Inco's Hand would
be vice chairman. Falconbridge CEO Derek Pannell would be president of
Inco Nickel and head all nickel, aluminum and zinc operations.
Phelps Dodge offered 0.672 shares of stock and C$17.50 per share in
cash for each Inco share. Inco raised its offer for Falconbridge to
C$17.50 per share cash and 0.55676 Inco shares for each Falconbridge
share.
Inco stock closed up 10.7 percent at C$72.28 and Falconbridge shares
rose 5 percent to C$58.33. Phelps shares fell 8 percent to $76.23.
Phelps Dodge said it would buy up to $3 billion in Inco convertible
subordinated notes to help Inco fund its offer for Falconbridge.
After the deals close, existing Phelps Dodge shareholders would hold 40
percent of Phelps Dodge Inco, with Inco shareholders on 31 percent and
Falconbridge holders 29 percent.
The company promised not to lay off any workers at Canadian operations
for three years after the deal closed, excluding workers already slated
to be let go.
Inco would pay Phelps Dodge a break-up fee of up to $925 million in
certain circumstances if the full three-way deal was not completed as
planned.
($1 = $1.12 Canadian)
(Additional reporting by Nick Trevethan, Mathieu Robbins in London and
David Ljunggren in Ottawa).
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