Just weeks after adopting a poison-pill plan aimed at thwarting a hostile bid, Falconbridge (fal.lv-t, fal-n) has agreed to a friendly cash-and-stock takeover bid from cross-town rival Inco (n-t, n-n).
Inco is offering $34 in cash or 0.6713 of one of its own shares accompanied, fittingly, by a nickel for each of Falconbridge's outstanding shares. The cash portion of the offer is capped at $2.87 billion and the share issuance is limited to 201 million shares.
Assuming all Falconbridge shareholders go for the cash option, each would receive $7.50 plus 0.524 of an Inco share for each Falconbridge share tendered. In all, the deal is valued at around $12.8 billion, based on Inco's closing price of $51.90 per share on the Toronto Stock Exchange on Oct. 7.
Falconbridge also agreed to pay Inco a US$320 million break fee if the deal falls through. Such a payment would present an obstacle to a competing bid, especially from Swiss-based miner Xstrata (xsraf-o, xta-l), which holds a 20.01% stake in Falconbridge.
Xstrata originally acquired a 19.9% stake in Falconbridge from Brascan (bnn-t) for around $2 billion in mid-August. At the time, Xstrata CEO Mick Davis said his company did not intend to remain as a long-term shareholder with a minority interest. The company subsequently shimmed its stake to 20.01% a few weeks later, via a private, off-market deal.
Facing a possible creeping takeover by Xstrata, Falconbridge adopted a shareholder-rights plan. The company also said at the time that it had retained CIBC World Markets and McCarthy Tetrault as advisers to evaluate and review "all value-creation opportunities."
Falconbridge CEO Derek Pannell says those opportunities included talks with Davis "some time ago" about an outright bid for Falco, but that an offer never emerged.
"Clearly, right now I think we've come up with a far better alternative for the company," Pannell concluded.
The new Falconbridge was founded in June via a $3-billion merger with Noranda, which saw Brascan more than halve its stake in Falconbridge to 20%. That deal came about after talks between Noranda and Chinese state-owned China Minmetals concluded without a deal.
Inco's bid is subject to at least two-thirds of the fully diluted Falconbridge shares being tendered. Thereafter, Inco would have to acquire all remaining shares under the same terms.
Inco CEO Scott Hand says his company is prepared to sell off Falconbridge's Nikkelverk refinery in Norway and certain related marketing businesses in an effort to expedite regulatory approval for its offer in Canada, the U.S. and the European Union. The company said the assets could be sold outright or offered to shareholders via an initial public offering or distribution.
Hand said he did not foresee any need for further asset sales to facilitate the acquisition.
In the end, if all of Falconbridge's shares were tendered, Inco shareholders would own around 54% of the new Inco, with Falco shareholders holding the remaining 46%, plus the $2.87-billion cash distribution. The enlarged Inco would remain headquartered in Toronto.
"We're bringing together two great companies with excellent assets to create a great Canadian player in the global markets," said Hand in a prepared statement. "This combination will create a mining and metals powerhouse, with outstanding growth prospects and a truly unique opportunity to create significant value for shareholders going forward."
Questioned on the timing of the deal, and why it wasn't done a couple of months earlier when the price might have been lower, Hand responded, "deals come together when deals come together."
"I think from our perspective we've always been interested in this possibility. Given the great job Derek and his team have done to put the two companies (Falconbridge and Noranda) together made it a lot easier to do the deal we're announcing today."
Hand says all the stars aligned to allow the deal: "Voisey's Bay is generating cash flow now, we've got Goro under control, and we've got great metals markets both in nickel and copper."
Hand will remain as CEO of the new Inco, and Pannell will be president. Four members of Falconbridge's board of directors will also join Inco's board.
The combined entity would rank as the world's largest nickel producer with pro forma estimated 2005 nickel output of around 333,400 tonnes, climbing to around 453,600 tonnes in 2009. Combined annual copper output would tally to around 600,000 tonnes, with the potential to double by 2011. The company would also be a leading cobalt producer, the world's third-largest producer of zinc, and is expected to supply about 10% of U.S. demand for aluminum.
On the financial side, pro forma combined revenues total US$6.4 billion for the first half of 2005, with combined cash flow from operations of US$1.25 billion. About half of the 2005 revenue would come from nickel, a third from copper, 10% from aluminum, and the balance from zinc, precious metals and cobalt.
Hand expects the deal to be neutral to earnings in the first full year after the acquisition and significantly accretive in the second year.
The business combination is also expected to generate an estimated US$350 million worth of annual "synergies" by the end of 2007. Pannell is confident that number will grow. Around US$240 million in estimated savings would result from feed-flow optimization, cost and other improvements, and maximizing throughput.
Pannel says that while a portion of the "synergies" will include up to 150 job cuts in Sudbury, many of the losses will come through attrition.
"We do not see realizing synergies as an exercise in job reduction," he said. "In fact, growth opportunities should allow us over time to create more jobs, both direct and indirect, particularly in new mine development."
The companies also expect a rationalization at the corporate level.
"This is one of the greatest acquisitions in the metals and mining industry, and one that many people have long thought should see the light of day," concluded Hand. "Well, it is happening now and I believe it will offer a very attractive future for the shareholders of Inco and Falconbridge."
The deal is expected to close in the first quarter of 2006.
Shares in Falconbridge were $3.51, or more than 11% higher at $34.33 in brisk afternoon trading in Toronto following the news on Oct. 11; Inco was off 90, or 1.7%, at $51 even.
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