FSG's Alex Turkeltaub on the Big Merger and Metals Mayhem
By Karl Heilman
30 Jun 2006 at 01:50 PM
ST. LOUIS (ResourceInvestor.com) -- The planned merger between Phelps Dodge [NYSE:PD], Inco [NYSE:N;TSX:N], and Falconbridge [NYSE:FAL;TSX:FAL] has created quite the stir. Pending completion of the merger, newly named Phelps Dodge Inco will become the largest nickel mining firm in the world. However, rival bidders Swiss based Xstrata [LSE:XTA], and Canadian nickel miner Teck-Cominco [TSX:TEK-B] are not officially out of the running. As has proved true thus far, in the world of mining mergers, the final outcome could prove to be quite the surprise.
RESOURCE INVESTOR: To first get us started, how would you describe the nature of this deal which seems never to have any finality?
ALEX TURKELTAUB: This deal makes a lot of sense for Phelps Dodge for three reasons. First, this allows Phelps Dodge to create the fourth mining super-major to compete with Rio Tinto, BHPBilliton, and Anglo-American. In an age of resource nationalism, where a lot of the best resources are located in unstable parts of the world and companies compete with both governments and state-owned companies, size matters quite a bit, and the deal will significantly expand Phelps Dodge’s ability to play in places like Russia, Africa, and Central Asia. Second, the transaction transforms Phelps Dodge into a multi-commodity company, which makes a lot of sense in terms of diversifying the company’s revenue and asset base. Single-commodity companies are forced to invest at the top of the cycle for their one commodity, meaning that they do deals when they are most expensive; by becoming a multi-commodity player, Phelps Dodge puts itself in a position to make some very smart deals down the road when the current price cycle ends. Finally, the reality is that Phelps Dodge is unlikely to continue existing as an independent entity for long if it remains a pure-play copper company. This transaction ensures that the company will be one of the last ones standing when the current cycle of consolidation is completed.
RESOURCE INVESTOR: Teck Cominco’s CEO, Donald Lindsay, said yesterday that there are no plans to raise the bid for Inco; does this put them out of the running?
ALEX TURKELTAUB: I don’t think so. While it seems likely that Phelps Dodge will prevail in the race for Inco and Falconbridge, the deals are complex enough where anything can happen, from Teck Cominco and Xstrata raising their bids to an entirely new bidder entering the race.
RESOURCE INVESTOR: There have been rumblings of Xstrata raising their C$52.50 bid for Falconbridge, however, Inco’s current C$62.11 price raise last week creates quite the premium. What is the likelihood that Xstrata raises its bid?
ALEX TURKELTAUB: Xstrata will probably raise its bid, if for no other reason than to force Phelps Dodge to pay a little bit more for Inco/Falconbridge. It’s important to remember that Xstrata will make a lot of money on the Phelps Dodge transaction – it purchased roughly 20% of Falconbridge quite cheaply a little while ago and will be paid an enormous premium for its stake. But Mick Davis is a very smart deal maker and I suspect they are reviewing all options, including potential other acquisitions.
RESOURCE INVESTOR: At this point, Xstarta could get an approximate $2 billion for its 19.8% ownership in Falconbridge if they sold their shares: A smart move? Or does Xstrata lose too much market control?
ALEX TURKELTAUB: A very smart move in the sense that when they bought 20% of Falconbridge, they assumed almost no risk. Either Xstrata would take over the whole company or be paid handsomely to go away by another suitor. The key question for Xstrata is what to do next – could the company go after Phelps Dodge, particularly if the latter’s stock prices falls significantly as the bidding war over Inco/Falconbridge progresses? Should it consider buying Teck Cominco? I’m not defending any of these options, but given the deal-making culture of Xstrata, they are clearly thinking through the various options.
RESOURCE INVESTOR: Earlier this week Canadian miners challenged the Phelps Dodge takeover and vied for a Canadian Resources mega company between Inco and Falconbridge, are there any large social implications in the long run for moving the Phelps Dodge-Inco-Falconbridge headquarters to Phoenix, Arizona?
ALEX TURKELTAUB: Does the Phelps Dodge transaction spell the end of Canada as a leading mining country? Probably. The center of gravity in North American mining will shift to Phoenix because one of the world’s four most important mining companies will be based there. But that is the inevitable result of market consolidation and a nationalistic desire to prevent this from happening will only create inefficiency. Having said that, I believe that Phelps Dodge will do everything possible to allay concerns in Canada, to maintain employment levels, and to leave some real decision-making power in the Toronto office of the merged firm. The last thing Phelps Dodge needs is labor unrest after a mega-merger and I’m sure everything possible will be done to avoid it.
RESOURCE INVESTOR: There was also talk this week that Phelps Dodge bought out Inco and Falconbridge so that it did not become a takeover target itself. Is this a legitimate concern, if so what firm would have proposed a bid?
ALEX TURKELTAUB: Absolutely. As I noted above, a pure-play copper company sitting on a large pile of cash is a very attractive target for potential acquirers. It’s hard to speculate as to who could have gone after Phelps Dodge. I think Anglo-American is probably one company that would have to look at it – with Anglo divesting so many assets and sitting on a pile of money itself, plus given Phelps Dodge’s strength in South America, it could have been a nice fit. But I think almost everyone would think about it.
RESOURCE INVESTOR: If the Phelps-Inco-Falconbridge merger goes through, Phelps Dodge Inco will become the world’s largest nickel producer and largest copper producer that that is publicly traded. Are there any other potential mergers that could compete with such a massive company?
ALEX TURKELTAUB: There are many potential mergers that could create even more dominant companies. There are many questions regarding the future of Anglo-American as an independent entity; if any of the large mining companies purchased Anglo, the result would be an industry-leading giant. Likewise, Norilsk Nickel of Russia has so far stayed away from big international acquisitions, but this may not be the case for long. And, of course, there are giant new entrants coming in from the Chinese market who could change the entire landscape of the industry.
RESOURCE INVESTOR: And finally, do you have any thoughts about a possible bid increase from Xstrata and Teck, or any possible mergers for the two firms?
ALEX TURKELTAUB: A key variable is what happens with regulatory approval in Europe. If the Inco-Falconbridge combination is judged problematic, we’re back to square one with respect to who will prevail in this merger. Could Phelps Dodge purchase just Inco, leaving Falconbridge to Xstrata? Could Teck Cominco become a target themselves? What other bidders may enter the auction? All of these issues are up in the air.
RESOURCE INVESTOR: Any more comments on the issue?
ALEX TURKELTAUB: I think one interesting issue that no one has analyzed is what Phelps Dodge does next. After all, if it really wants to be a major multi-commodity company, akin to BHPBilliton and Rio Tinto, it may have to make further acquisitions to enter new businesses. Does the company go into the energy space as BHPBilliton has done? Does it go after an aluminum company such as Alcan or even Alcoa? All of these decisions will have to be made soon.
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