ANOTHER day, another astounding twist in the gripping M&A pot-boiler that is Canadian miner Inco’s attempted marriage to its local rival Falconbridge. This time the romance may lead to the birth of a new mining giant.
Weeks before Swiss miner Xstrata’s all-cash bid for Falconbridge was set to go before shareholders, Inco, Falconbridge and Arizona-based copper producer Phelps Dodge trumped it with an ambitious three-way merger announced on Monday.
The three together will be the world’s fifth-largest mining company, with an enterprise value of US$56bn (E44bn, £30.5bn) putting it just behind Brazilian iron ore giant Companhia Vale do Rio Doce. It will be the largest nickel producer and the second-largest copper producer.
Under the deal Inco will first make a sweetened bid for Falconbridge, at the equivalent of $62 a share, an implied premium of about 18% to Xstrata’s offer for Falconbridge. Phelps will then buy Inco for the equivalent of $80 in cash and stock, a 60% gain on the company’s share price last October.
Scott Hand, Inco’s chief executive, said: ”This is going to be one hell of a company. It’s going to be terrific.”
On the most basic level, the transaction makes sense. Inco’s bid for Falconbridge had been trumped by Xstrata and it was itself facing a bid from US miner Teck Cominco, which made it near impossible for it to increase its offer.
Inco desperately needed more cash and Phelps Dodge, as the world’s second-largest copper producer at the end of a copper boom, had more cash than it knew what to do with. Phelps chief executive Steven Whisler spent much of last year fighting off demands from hedge funds that he return a huge portion of his cash pile directly to shareholders.
Phelps’ move was clearly opportunistic. One adviser to the deal told The Business: ”It was put together very quickly and clearly the timetable was driven by the need to come forward before the Xstrata bid was closed on the 12 July.
It is a giant bet for Phelps, which is smaller than Falconbridge, but bigger than Inco. Even with its cash pile, the $22bn in financing it is taking on will raise the ratio of its debt to its capital from a rock-Âbottom 10% to 45%.