Phelps Dodge pushes ahead with bid — Asarco, Cyprus only interested in ‘merger of equals’

Copper giants Asarco (AR-N) and Cyprus Amax Minerals (CYM-N), which are negotiating a 2-way merger, have asked Phelps Dodge (PD-N) to postpone its hostile takeover bid until after the merger is complete.

A defiant Phelps Dodge responded by formalizing its takeover offer for both companies through the filing of a registration statement with the U.S. Securities and Exchange Commission. It is offering 0.4098 share of Phelps Dodge for each share of Asarco and 0.3135 share for each share of Cyprus. However, it will withdraw the offer if the proposed 2-way merger gets a green light from shareholders.

Originally, Phelps Dodge hoped to bring all parties together to negotiate a 3-way deal. However that effort went off the rails when Cyprus and Asarco countered with an offer of a US$5 dividend per share, in hopes of enticing shareholders to stay the course and accept the 2-way merger deal.

The dividend defence will cost both companies dearly. If accepted, Asarco would pay out nearly US$200 million, while Cyprus would pay out more than US$450 million, significantly cutting into their combined cash position of US$1.4 billion.

Asarco and Cyprus have not ruled out the possibility of negotiating a merger with Phelps Dodge. However, they insist it would have to be a “merger of equals” between the proposed Asarco Cyprus and Phelps Dodge.

This proposal would require Phelps Dodge to increase the share exchange ratios of its bid to 0.53 share of Phelps Dodge for every Asarco share and 0.4055 share for every Cyprus share.

Phelps Dodge Chairman Douglas Yearley does not appear to favour the “merger of equals” proposal. He says his company’s existing offer is “fully priced” and the exchange ratios proposed by Cyprus and Asarco are “so unreasonable that their sincerity is questionable.” The increases amount to nearly 30% more for both companies.

Phelps Dodge has already increased by 8% its original proposed bid of 0.3756 share per Asarco share and 0.2874 share per Cyprus share.

Shareholders of Asarco and Cyprus now face two options. If they vote in favour of the 2-way merger on Sept. 30, they will receive the one-time, US$5-per-share dividend promised by Asarco and Cyprus. This option does not rule out the posssibility that Phelps Dodge will return to the bargaining table to negotiate an offer for the merged entity.

If shareholders accept the Phelps Dodge offer, they will receive a 30% premium over their respective share prices, plus a US$2-per-share annual dividend. Asarco and Cyprus shareholders also would receive shares in Phelps Dodge.

“Shareholders recognize the benefits of the three-way merger, but both camps are still positioning themselves, leaving the door open for more negotiating,” says ABN AMRO mining analyst Vahid Fathi. “Eventually, they will hammer out an acceptable price between Phelps Dodge’s low bid and Asarco’s and Cyprus’s high response.”

Meanwhile, Phelps Dodge has filed suit against Asarco and Cyprus, alleging breach of “fiduciary duties by impermissibly prohibiting directors from informing themselves of any third-party proposal.”

If Asarco and Cyprus complete their merger, the resulting company would be the world’s second-largest copper producer, behind Chile’s state-owned Corporacion Nacional Del Cobre de Chile (Codelco), which cranks out roughly 2 billion lbs. annually.

If Phelps Dodge succeeds in its takeover bid, the resulting company would likely surpass Codelco for the top spot, with annual production projected at 3.8 billion lbs.

Either way, a merger would consolidate copper operations in the southwestern U.S., leaving only Australia’s Broken Hill Proprietary (BHP-N) with any significant holdings in the region. (Those holdings include the San Manuel smelting and refining complex, north of Tucson, Ariz., which are now up for sale.)

Both mergers are expected to result in savings of more than US$200 million in administrative and exploration costs. The total operating cost under each scenario is pegged at US60 cents per lb. copper.

Phelps Dodge recently announced plans to cut its future cash production costs by about US9 cents per lb. at its Morenci mine in Arizona. The company hopes to achieve this by converting all production to the leaching process through expansion of the solution extraction-electrowinning facilites. The US$220-million conversion will allow the mine to produce at the current rate of about 800 million lbs.