Phelps to buy Inco and Falconbridge for $40B - East Valley Tribune: Business

Phelps to buy Inco and Falconbridge for $40B

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Posted: Monday, June 26, 2006 12:23 pm | Updated: 4:36 pm, Fri Oct 7, 2011.

NEW YORK — Phoenix-based Phelps Dodge Corp. is buying Canadian mining companies Inco Ltd. and Falconbridge Ltd. for about $40 billion in a bet that global demand will continue to be strong enough to support surging metals prices.

The deal could resolve what had been a four-way bidding war and would create a dominant copper and nickel producer in the North American market. The company would be the world’s largest nickel producer and the largest publicly traded copper producer.

If the offer is approved, Phelps Dodge would have thwarted two other bids for Inco and Falconbridge. Inco originally announced its deal to buy Falconbridge last October. As the companies sought regulatory approval, both received alternate bids: Vancouver-based Teck Cominco Ltd.’s bid for Inco and the Swiss mining company Xstrata PLC sought Falconbridge. The offer from Phelps, which has received board approval from all three companies, puts a premium on the prices of both companies.

Demand for commodities, particularly from rapidly industrializing China, have steeply pushed up prices for metals such as nickel, aluminum, zinc, copper and others in the first half of the year, generating a growing stream of cash for mining and metal companies.

The combined company, to be called Phelps Dodge Inco, would have operations in more than 40 countries and employ about 40,000 people globally. It would be the world’s largest publicly traded copper producer, putting it in a leading position as copper prices have quadrupled in the past five years alone.

Inco shares jumped $6.68, or 11.5 percent, to $64.94, Falconbridge shares were up $2.84, or 5.8 percent, to $52.14 and Phelps Dodge shares dropped $6.89, or 8.3 percent, to $76.06, in afternoon trading on the New York Stock Exchange.

‘‘We’re extremely excited about the powerhouse we’re creating,’’ Phelps Dodge Chief Executive J. Steven Whisler told a conference call with analysts and investors. ‘‘We truly have the chance to step up to the big leagues by combining our three companies.’’

Whisler, who will be CEO and chairman of the combined company once the deal is complete, also said, ‘‘The transaction we announced this morning is clearly transformational. Our key driver in this transaction is the potential for significant synergies.’’

Under terms of the deal, Inco shareholders will receive 0.672 shares of Phelps Dodge stock plus 17.50 Canadian dollars ($15.59) per share in cash for each share of Inco stock, representing a premium of 23 percent to Inco’s market price as of close of trading on June 23.

Inco in turn will increase a previous offer for Falconbridge to 17.50 Canadian dollars ($15.59) from 12.50 Canadian dollars ($11.14) and the exchange ratio to 0.55676 shares of Inco, from 0.524 shares, for each share of Falconbridge.

Based upon the value of Phelps Dodge’s total offer for Inco of 80.13 Canadian dollars ($71.40) per share, the company said the implied value of Inco’s increased offer for Falconbridge is 62.11 Canadian dollars ($55.34), which is a 12 percent premium to Falconbridge’s closing price on June 23.

‘‘I know our cultures are compatible and our people will be treated with respect,’’ Falconbridge CEO Derek Pannell told the conference call.

The most vulnerable part of the deal is the portion involving Falconbridge, Linda Varoli of Wall Street Access said. Phelps Dodge has said that the Inco deal is not contingent on the closing of the one with Falconbridge. The Phelps offer for Falconbridge represents an 18 percent premium over the bid from Xstrata.

The chief financial officer of Phelps Dodge, Ramiro Peru, said the company had arranged $22 billion in financing from Citigroup and HSBC. The financing is sufficient, he said, to bring the transaction to closure. Phelps Dodge also said it planned a $5 billion share buyback program to be completed within 12 months after the close of the acquisition deal.

While the plan faces reviews by competition authorities in Europe, the United States and Canada, Phelps said Monday that it did not anticipate any major regulatory hurdles for the deal. It is expected to close in September with Phelps Dodge shareholders owning about 40 percent of the combined company, Inco shareholders owning about 31 percent, and Falconbridge holders owning about 29 percent.

Phelps said the combination should result in annual synergies of $900 million within the next two years. Savings from the Inco-Falconbridge combination alone are estimated at $550 million.

The main office and the new company’s copper division will be headquartered in Phoenix. Inco Nickel, the new company’s nickel division, will be based in Toronto. Incos CEO Scott Hand would be vice chairman, while Pannell will become president of Inco Nickel. The new company’s 15 member board would consist of 11 members from Phelps Dodge and four from the boards of Inco and Falconbridge.

Phelps has guaranteed no layoffs in mining and processing operations for at least three years.

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