Freeport, Phelps Deal Wins Vote

Freeport-McMoRan Copper & Gold (FCX-N) and Phelps Dodge (PD-N) have completed their merger after shareholders voted in favour of the proposed combination of the two companies.

Shareholders of both companies provided 98% majorities for the proposal, under which Phelps Dodge shareholders get US$88 in cash and 0.67 of a Freeport share for each Phelps Dodge share. The cash element of the transaction is about US$18 billion, and Freeport will be issuing 137 shares to bring its capitalization to 334 million shares.

In a separate vote, Freeport shareholders agreed to increase the company’s authorized capital to 700 million shares.

The new company will be managed by Freeport chief executive Richard Adkerson, with Phelps Dodge chief operating officer Timothy Snider taking up that title at Freeport. Phelps Dodge’s chief executive Steven Whisler and chief financial officer Ramiro Peru are both retiring. Three Phelps Dodge outside directors, Gen. Charles Krulak, Jon Madonna and Dustan McCoy, will be added to the Freeport board.

Freeport has floated US$16 billion in senior notes to raise the cash for the Phelps Dodge acquisition, and will draw on a US$1.5-billion line of credit. A US$2.5-billion series of notes (the A series), bearing interest at the London interbank offer rate (LIBOR) plus 1.5%, matures in March 2012, and a second series (the B series), totalling US$7.5 billion, pays at LIBOR plus 1.75% and matures two years later; both are secured. Another US$10 billion in notes is unsecured, with US$1 billion due in April 2015 and bearing interest at LIBOR plus 3.25%, US$1.5 billion due in April 2015 and paying 8.25%, and US$3.5 billion due in April 2017 and paying 8.25%.

In addition, the company is raising money through a 35-million-share equity offering (which underwriters can increase to 40.25 million shares) and a 10-million-share preferred stock issue worth US$1 billion. Cash raised in the offerings will go to retire debt.

Freeport made US$1.4 billion on revenues of US$5.8 billion in 2006, for US$6.63 per share. In 2005, the company made US$935 million on revenues of US$4.2 billion. It produced 545,000 tonnes copper and 1.7 million oz. gold, mainly from the Grasberg mine in Indonesia; copper production was down 17% and gold production down 38% from 2005.

Phelps Dodge made US$3 billion (US$14.83 per share) on revenues of US$11.9 billion in 2006, up from US$1.6 billion profit and US$8.3 billion in sales in 2005. It produced 1.1 million tonnes copper and 31,000 tonnes molybdenum during the year, essentially the same as in 2005.

Year-end balance sheets show Freeport with US$907 million in cash, plus US$1.2 billion in receivables and inventory. About US$972 million in liabilities were to come due in 2007. Phelps Dodge had US$4.9 billion in cash, plus US$2.7 billion in other current assets, with US$3.3 billion in current liabilities. The combined company will have about US$4.2 billion in long-term debt and other long-term liabilities, plus minority interests of US$213 million.