Swiss Raise Bid for Nickel-Mining Companyadmin
In a move that intensifies the fight for Falconbridge, Canada’s second-largest nickel-mining company, a Swiss mining conglomerate, Xstrata, increased its cash offer on Tuesday to 59 Canadian dollars a share, 12 percent above its offer two months ago.
The bid also puts pressure on Inco, the leading Canadian nickel producer, which has agreed in principle to buy Falconbridge in a cash-and-stock offer worth 58.36 Canadian dollars a share. That was part of a proposed three-way merger under which Phelps Dodge, of Phoenix, would acquire the Canadian companies. It would value the combined Canadian operations at 45.25 billion Canadian dollars ($40 billion).
In contrast, this latest bid by Xstrata values the 80 percent of Falconbridge it does not already own at 18.5 billion Canadian dollars ($16.35 billion).
The three-way merger would be one of the largest ever in global mining and is being encouraged by high commodity prices, which have left companies like Xstrata, based in Zug, Switzerland, with large cash reserves. These companies are looking to acquire others to rapidly expand their revenue and assets, and to extract savings by consolidating operations.
Last month, Inco increased its offer for Falconbridge, first made last autumn.
Mick Davis, the chief executive of Xstrata, said in an interview that the major selling point of its bid was that it is all-cash. ”It is a very powerful offer on the table,” Mr. Davis said. ”There’s no market risk associated with cash.”
But in statements, Phelps Dodge and Inco maintained that their plan offered shareholders more. When the three-way merger is completed, the companies said, their offer would yield just over $61 a share for Falconbridge stockholders, based on Phelps Dodge’s midday share price Tuesday.
Inco’s chairman and chief executive, Scott Hand, said, ”Only Inco’s offer gives both current Inco and Falconbridge shareholders the opportunity to participate in the great earnings, cash flow and growth potential of Phelps Dodge Inco.”
David Davidson, an analyst with Paradigm Capital in Toronto, said that the bids were more or less equal at this point. ”Now the question is, Do you value cash the same way you value cash and paper?”
Assessing shareholder sentiment on that question is difficult.
Xstrata’s cash offer could mean high tax bills for longtime Falconbridge shareholders who live in Canada. But hedge funds and other short-term investors can be assumed to be more interested in cash.
Mr. Davidson said Canadian institutional investors, who are bound by rules that require them to invest part of their holdings in Canada, might also favor a bid like Inco’s that includes equity. ”The major institutional investors will have to invest the cash somewhere,” he said. ”If you lose Falconbridge, your options become more limited.
Both Mr. Davidson and Orest Wowkodaw, an analyst at Canaccord Capital in Toronto, expect Inco to increase its bid, if only by a little. ”Xstrata did not put out any kind of knockout punch here,” Mr. Wowkodaw said.
Several factors limit how much further either company will go.
Mr. Wowkodaw estimated that Falconbridge’s stock price in relation to its cash flow was already twice that of comparable mining companies. While Mr. Davis of Xstrata said that his new offer for Falconbridge still offered good value to his shareholders, he said the point at which that is no longer the case might be fast approaching despite currently buoyant nickel prices.
Inco, which is eager to combine its nickel operations in and near Sudbury, Ontario, with those held by Falconbridge, has limited financial maneuvering room.
It was able to increase its bid in June because of financing that will be provided by Phelps Dodge. But many debt and equity analysts are already concerned about the $20 billion in debt that Phelps Dodge will hold at the end of the three-way merger deal. Any setback in metals prices would only heighten such concerns, as would an increase in the debt created by the merger.