Xstrata Raises Hostile Bid for Falconbridge by 7.2%
July 19 (Bloomberg) -- Xstrata Plc increased its hostile bid for Canadian nickel miner Falconbridge Ltd. by 7.2 percent to $16.3 billion to thwart Phelps Dodge Corp.'s plans for the mining industry's largest takeover.
Xstrata, the Zug, Switzerland-based producer of coal, zinc, copper and chrome, said in a statement that it will pay C$62.50 ($55.08) a share for the 80 percent of Falconbridge it doesn't already own. The company earlier offered C$59. Phelps Dodge, the world's third-largest copper producer, said its offer was ``best and final'' and a better deal for Falconbridge's investors.
Some investors say Xstrata's bid was a knockout blow. Shares of Phelps Dodge surged today on speculation the company will be worth more without the added debt and new stock needed for its deal, said Nancy Havens-Hasty, president of New York-based Havens Advisors LLC, which runs a $200 million hedge fund.
``People think that maybe Phelps Dodge isn't going to win,'' Havens-Hasty said.
Mining companies are battling for natural resource assets as China, the world's largest consumer of metals, drives copper, nickel and zinc to record levels. The price of nickel, used in stainless steel production, has more than tripled in the past three years.
Toronto-based Falconbridge said in a statement it is reviewing the details of Xstrata's new offer.
Phelps Dodge, based in Phoenix, on July 16 raised its friendly offer for Toronto-based Inco Ltd. and Falconbridge, now valued at about C$43.5 billion in cash and stock, in what would be the biggest mining takeover.
Best, Final Offer
Phelps Dodge Chief Executive J. Steven Whisler said in a statement that his company's bid ``is the only proposal that allows Falconbridge shareholders to participate in the enormous synergies and upside available only by combining these three companies. This is the best and final proposal for Falconbridge that we will support. It is time for Falconbridge shareholders to decide what is truly in their best interests.''
Shares of Phelps Dodge rose $3.77, or 4.9 percent, to $81.03 at 4:03 p.m. in New York Stock Exchange composite trading, the biggest one-day gain since June 29. The rally may signal investors expect Xstrata to acquire Falconbridge.
``It's hard to see that this is not close to the final chapter,'' said Gavin Graham, director of investments at Toronto- based Guardian Group of Funds, which holds Falconbridge and Inco shares among $5.3 billion of assets.
Shareholder Opposition
If Xstrata wins Falconbridge, Phelps Dodge ``will not have to issue as many shares to buy Inco as the company would if it had to buy Inco and Falconbridge,'' Havens-Hasty said. ``On top of it, you have some shareholder discontent. It could keep the deal from happening.''
Atticus Capital LLC, a New York-based hedge fund and the second-largest Phelps Dodge shareholder as of March 31, ``intends to vote down this deal and would be surprised if other shareholders didn't reach the same conclusion,'' spokesman Robert Coburn said today in an interview.
Atticus, which manages more than $11 billion, ``continues to believe a return of capital is the best option for Phelps Dodge,'' Coburn said. Atticus was among the hedge funds that blocked Deutsche Boerse AG's bid for London Stock Exchange Plc. Phelps plans to take on $19 billion in debt to fund the Inco and Falconbridge deals.
Whisler said he wasn't surprised by opposition from Atticus, which reflects the hedge fund's ``short-term strategies based on their own objectives.''
Falconbridge shares rose C$1.34, or 2.2 percent, to C$63.38 at 4:15 p.m. in Toronto, and Inco jumped C$2.35, or 3.1 percent, to C$79.29. Xstrata climbed 94 pence, or 4.9 percent, to close at 2,005 pence in London. It has tripled in the past four years.
Lost Bid
Xstrata, which lost to BHP Billiton Ltd. last year in its hostile bid to acquire Australia's WMC Resources Ltd., made its initial bid for Falconbridge on May 17. The revised offer is the second increase in two weeks, and values Falconbridge at about 8 times earnings before interest, taxes, depreciation and amortization based on the Canadian company's earnings in the four quarters ending March 31. BHP Billiton paid 7.3 times Ebitda for WMC.
Falconbridge, the world's fourth-largest nickel producer, would diversify Xstrata's production portfolio. Nickel prices have risen 78 percent this year and copper 77 percent.
``They really don't want to miss out this time, but at the same time they don't want to overpay,'' Greg Smith, executive director of London-based Fat Prophets, said today by phone. Xstrata may raise its bid to C$65, he said.
Special Dividend
Xstrata said it amended its offer to include a special dividend due to Falconbridge shareholders of C$0.75 a share. The improved bid values Falconbridge at about C$24.1 billion, including the dividend, Xstrata said. The company bought 20 percent of Falconbridge at C$28 a share in August and September 2005.
Xstrata Chief Executive Officer Mick Davis, 48, said in an interview today from Zug that he made ``a tactical error'' in not making a full offer for Falconbridge last year. Should its bid fail, he said the company is ``continuously looking at alternative propositions.''
``It's time to draw a line under it now,'' Davis said. ``I think the shareholders of Falconbridge are tired of this.''
Inco's bid for Falconbridge ``remains very competitive,'' Chief Executive Officer Scott Hand said today in a conference call from Toronto. Xstrata's increased bid shows the Swiss company recognizes the strong outlook for metals that Phelps Dodge and Inco have forecast in their merger plans, he said.
Falconbridge's shareholders can expect C$64.92 a share if the three-way merger of Phelps Dodge, Inco and Falconbridge proceeds, Hand said in a later statement.
Glencore Support
The Swiss company said it has received support from Baar, Switzerland-based trader Glencore International AG, which controls a 36 percent stake in Xstrata.
The increased offer by Xstrata, which will expire 8 p.m. Toronto time on Aug. 14, is one of four involving five companies. In May, Vancouver-based Teck Cominco Ltd. bid for Inco, which had already agreed to acquire Falconbridge.
``We are watching and observing with interest,'' Doug Horswill, a spokesman for Teck Cominco, said in a telephone interview. ``We are on the sidelines.
Teck Cominco's bid for Inco is conditional on the termination of Inco's agreement to buy Falconbridge. Inco's Hand said the company would merge with Phelps Dodge even if it isn't able to acquire Falconbridge.