Freeport-McMoRan agrees to buy Phelps for $25.9 billion
– Freeport-McMoRan Copper & Gold Inc. (FCX.N: Quote, Profile, Research) said it agreed to buy much larger Phelps Dodge Corp. (PD.N: Quote, Profile, Research) for $25.9 billion in cash and stock to create the world’s largest publicly traded copper company.
The agreement is the latest multi-billion dollar takeover deal in the global mining industry, which has been consolidating as companies scramble to add reserves and try to capitalize on record high metal prices.
Copper now trades at $6,765, down from a record of $8,800 in May but up 53 percent on the year.
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"This kind of big merger could raise the company’s ability to take advantage in price negotiations, therefore this should be positive for copper prices," said Naohiro Niimura, director at Barclays Capital Japan Ltd.
"In the current bearish trend, the market is not too sensitive about buying copper actively, but in the medium- and long-term it should be positive."
Freeport-McMoRan will pay a total of $126.46 per Phelps Dodge share, a premium of 33 percent to Phelps Dodge’s November 17 closing price. Phelps Dodge share holders will receive $88 per share and 0.67 of a common share of Freeport-McMoRan.
In all, Freeport is paying $18 billion in cash and $7.9 billion in shares.
The takeover price values Phelps Dodge at around 8 times forecast 2006 earnings, compared with forward price earnings ratios of 8 for Freeport and 9 for diversified miners BHP Billiton Ltd. (BPH.L: Quote, Profile, Research) and Rio Tinto Plc (RIO.L: Quote, Profile, Research).
Freeport-McMoRan operates the Grasberg mine in Indonesia, which it said is the world’s largest copper and gold mine in terms of reserves. Phelps Dodge has mines in North and South America and Africa.
The combined company would produce a net 3.1 billion pounds of copper and a net 1.7 million ounces of gold this year. Combined reserves would total 75 billion pounds of copper and 41 million ounces of gold.
"This acquisition is financially compelling for FCX shareholders, who will benefit from significant cash-flow accretion, lower cost of capital, and improved geographic and asset diversification," Freeport-McMoRan Chief Executive Richard Adkerson said in a statement.
Freeport-McMoRan has received financing commitments from JPMorgan (JPM.N: Quote, Profile, Research) and Merrill Lynch (MER.N: Quote, Profile, Research) to finance the deal’s $18 billion cash portion. Its debt would stand at $17.6 billion after the transaction.
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The company said it would issue 137 million shares to Phelps Dodge shareholders, resulting in Phelps Dodge stockholders owning 38 percent of the combined company.
MINING MERGERS
Phelps had been rumored to be a takeover target of Grupo Mexico, while Phelps itself had been trying to buy two Canadian companies, Inco Ltd. (N.TO: Quote, Profile, Research) and Falconbridge Ltd. in a stock and cash deal worth $40 billion.
But Phelps lost the nickel and copper producers to all-cash offers from Brazil’s Companhia Vale do Rio Doce (CVRD) (VALE5.SA: Quote, Profile, Research) and Swiss-based Xstrata Plc. Inco is now controlled by CVRD and Falconbridge has been taken over by Xstrata (XTA.L: Quote, Profile, Research).
The boards of Freeport-McMoRan and Phelps Dodge have both unanimously approved the terms of the agreement and have recommended that their shareholders approve the transaction.
The deal is subject to approval of both firms’ shareholders and regulators. The transaction is expected to close at the end of the first quarter of 2007.
For the 12-month period ended September 30, 2006, the companies had combined revenues of $16.6 billion. For the entire year of 2006, the two companies are expected to generate estimated combined operating cash flows totaling $6.5 billion.
Freeport’s Adkerson will be the chief executive of the combined company, while Freeport Chairman James Moffett will continue in that role. J. Steven Whisler, Phelps Dodge chairman and CEO, is expected to retire after 30 years at the company.
Freeport-McMoRan is being advised by JPMorgan and Merrill Lynch, while Phelps Dodge is being advised by Citigroup (C.N: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research).
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Phelps has been under pressure from shareholders, including activist stockholder Atticus Capital, which owns nearly 10 percent of the company and had been seeking a buyer for Phelps.
Atticus began agitating for change early in 2006 and helped derail the company’s plans to buy Inco and Falconbridge, calling on it instead to buy back shares or consider selling itself.
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