Inco on the brink-o (September 11, 2006)

Just a week after officially shunning Companhia Vale do Rio Doce (CVRD) (rio-n) in favour of Phelps Dodge (PD-N), Inco (N-T, N-N) has terminated its combination agreement with the Arizona-based copper miner.

“It was very clear from the proxies we received that Inco shareholders were not going to support the Phelps Dodge transaction, so the two companies agreed that it was in our respective best interests to move on,” said Inco CEO Scott Hand in a statement.

Inco has already paid Phelps a US$125-million break fee, and would have to top that up to US$475 million if another company buys it within a year.

Inco’s shareholders had been slated to vote on the deal on Sept. 7; the plan needed the approval of at least two-thirds of Inco’s shareholders. The vote has been cancelled, as has a similar vote by Phelps shareholders scheduled for Sept. 25. Approval by Investment Canada was pending.

Inco says the termination of its agreement with Phelps frees it to solicit offers from other potential bidders, and it remains open to talks with CVRD. The Brazilian iron ore giant previously rejected Inco’s invitation to talk about improving its offer.

CVRD’s all-cash offer of $86.00 per Inco share recently won approval from the Canadian Competition Bureau and the United States competition authorities; it still requires the nod from Investment Canada and the European Commission. The Brazilian figures it should pass muster, as its operations are complementary to Inco’s, and it currently does not produce any nickel.

CVRD’s bid expires at the end of September.

Phelps Dodge CEO Steven Whisler said that the “synergies” offered under the proposed combination with Inco did not warrant competing with CVRD’s bid.

Phelps’ previous plan to swallow up Inco and Falconbridge (fal-t, fal-n) was expected to deliver annual synergies of around US$900 million. Falconbridge was subsequently taken out by Swiss miner Xstrata (XSRAF-O, XTA-L), leaving synergies of just US$215 million between Phelps and Inco.

Teck Cominco (TCK.B-T, TCK-N) let its offer for Inco expire in mid-August after it failed in an ambitious attempt to raise some $5.7 billion overnight. The funds would have allowed the Vancouver-based diversified miner to boost the value of its offer to $89.00 per share.

Phelps’ bid had recently been leading the way, valuing Inco shares at around $87.67 apiece, based on its closing share price in New York on Sept. 1. Phelps’ bid of $20.25 in cash plus 0.672 of one of its own shares had been benefiting from a stronger share price since Teck’s withdrawal from the race — that’s when analysts began widely tipping Brazil’s all-cash offer as the winner.

Shares in Inco fell 39 to $85.47 in morning trading in Toronto following the news on Sept. 5. In New York, Phelps was US$2.06 better at US$92.87, while CVRD was up US58 at US$22.84.