DOING SOME DIGGING – Is a bigger Inco too big?

Earlier this week (Feb. 21), INCO LIMITED announced that it is extending its offer for FALCONBRIDGE to the end of J...
Earlier this week (Feb. 21), INCO LIMITED announced that it is extending its offer for FALCONBRIDGE to the end of June 2006. In Inco's words, "This extension is intended to provide additional time for the competition authorities to complete their review of the pending transaction."

The U.S. Department of Justice alone is staring at 9 million pages of information supplied by Inco about the merger. The European Commission will probably move its investigation into a second phase, which could last as long as 90 days.

Does this mean the combined company might run afoul of antitrust laws? Some shareholders must be wondering the same thing. The price of Inco shares slid downward during the second week of February to around $53, but rebounded to the $58/share range after chairman and CEO Scott Hand addressed the extension in a Feb. 21 conference call.

He told listeners: "We believe, and we've indicated to both agencies, that the combination of our two companies does not give rise to any competition issues since market forces would prevent this from happening. As such, we believe that the transaction should be able to proceed without a remedy so that the substantial efficiencies offered by this combination can be realized. However, if one is required, we maintain that an appropriate remedy can be worked out with the authorities."

The "remedy" Hand speaks of might be a forced divestiture of certain assets. One name that has come up as a potential divestiture is Falconbridge's Nikkelverk refinery in Norway.

Two business sectors have been the topic of further speculation. One is Inco's role as a supplier of nickel super alloys for critical rotating parts such as turbine blades for jet engines. The second is its share of the market for plating nickel. Hand insisted that plenty of competition exists in both sectors, and that the new Inco would not have a stranglehold on these markets.

Other questions arose as my editor, Jane Werniuk, and I exchanged e-mails after the conference call. Could the new Inco be such a dominant force in the market that it would restrict the growth of new projects, thus reducing the nickel supply and driving up the price? I don't think so. As long as commodity prices remain strong there will be lots of nickel miners both large and small. It would be impossible for Inco to gobble all of them up and delay new production.

Is Inco a victim of its own success? The combined company will be the largest nickel producer on the planet (if not the universe) and one of the largest copper producers. Regulators are naturally attracted to a company that will have worldwide assets in the neighbourhood of $25 billion. It is their job to discourage cartels and monopolies. Do the authorities look favourably on the new Inco, or will they impose a "remedy" that will significantly impact Inco's profitability?

Hand sees no indication that the deal will be watered down by regulators. He said, "Let me stress that to date, nothing has been raised in these regulatory review processes that gives us cause for concern."


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