NEW YORK – Phelps Dodge Corp. (PD) on Monday said it would acquire Canada's Inco Ltd. (N) and Falconbridge Ltd. (FAL) for about $40 billion in a blockbuster deal to create the world's largest nickel miner and second-largest copper producer.
Phelps Dodge said it would buy Inco for C$80.13 per share in cash and stock. Inco, which already agreed to buy Falconbridge, in turn raised its existing offer for Falconbridge to an implied value of C$62.11 per share. Phelps Dodge presented the terms in Canadian currency and the deal value in U.S. dollars.
The deal had an immediate impact on commodity markets, where nickel gained $200 a metric tons on the news.
"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," UBS analyst Robin Bhar said. "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."
The stocks also moved sharply, with Inco up 10.6 percent at C$72.15 and Falconbridge rising 4.2 percent to C$57.85 in morning Toronto Stock Exchange trading. Phelps Dodge shares fell 8.4 percent to $76 on the New York Stock Exchange.
"From the price they are prepared to pay you have to infer that Phelps Dodge believes that prices will stay strong. It's the only way they can justify these sorts of numbers," a London mining analyst said.
But both Inco and Falconbridge already faced unsolicited bidders — Inco from Teck Cominco Ltd. and Falconbridge from Xstrata Plc. — and at least in Xstrata's case, a source familiar with their situation said Xstrata had no intention of abandoning its bid despite the Phelps Dodge deal.
"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," Haywood Securities analyst Kerry Smith said.
"At least there you would have fewer regulatory hurdles than I think you will have with this transaction," Smith said.
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The companies forecast combined annual cost savings of $900 million by 2008. The deal would also add to earnings from 2008 onward, while adding to cash flow immediately.
The combined Phelps Dodge Inco Corp. would be based in Phoenix, where Phelps Dodge has its headquarters, with the new Inco Nickel division run out of Toronto. The sides said they did not expect any antitrust issues.
Phelps Dodge Chief Executive J. Steven Whisler would be chairman and CEO and Inco CEO Scott Hand would be vice chairman. Falconbridge CEO Derek Pannell would be president of Inco Nickel and head all nickel, aluminum and zinc operations.
The combined entity also planned to buy back $5 billion in stock in the 12 months after the deal closed.
Phelps Dodge said the deal was not contingent on Inco closing its acquisition of Falconbridge and Inco shareholders would receive the same consideration they would have in a three-way deal. The deal was expected to close in September.
The new Phelps Dodge Inco would be the world's largest nickel producer and the largest publicly listed copper producer, with major positions in other metals including molybdenum and cobalt. Phelps Dodge said the combined company would be the world's fifth-largest miner by enterprise value.
Phelps Dodge offered 0.672 shares of stock and C$17.50 per share in cash for each Inco share. In turn, Inco raised its offer for Falconbridge to C$17.50 per share cash and 0.55676 Inco shares for each Falconbridge share.
To support Inco's offer for Falconbridge, Phelps Dodge said it would buy up to $3 billion in convertible subordinated notes issued by Inco.
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 operating companies for three years after the deal closed, excluding workers already planned 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.
Phelps Dodge was advised by Citigroup and HSBC. Inco was advised by Morgan Stanley, RBC Capital Markets and Goldman Sachs. Falconbridge was advised by CIBC World Markets.
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