At a time when
Moreover, Phelps Dodge is taking its case directly to shareholders after being repeatedly rebuffed by the two merging partners.
The Phoenix-based producer proposed to exchange 0.3756 share for each share of Asarco, and 0.2874 share for each share of Cyprus. Both offers were immediately rejected, prompting Phelps Dodge to sweeten each deal. It raised the exchanges to 0.4098 share for each share of Asarco and 0.3135 share for each share of Cyprus, representing a 30% premium for both companies.
While the combined deal has a value of US$2.7 billion, neither offer is conditional on the acceptance of the other.
“The industry needs consolidation,” says Phelps Dodge Chairman Douglas Yearley.
Phelps Dodge hopes the premium will attract shareholders to its proposal.
The company is also offering a tax-free merger, but with a higher dividend.
It plans to continue its current yearly dividend of US$2 per share after the completion of any business combination. Asarco and Cyprus both have quarterly dividends of US5 cents per share. On a dividend yield basis, Phelps Dodge’s dividend is four times that of Asarco or Cyprus.
Phelps Dodge also highlighted its historic stock performance to entice shareholders. Over the past 10 years, the company has produced a return on investment of 161% on a total return basis with dividends reinvested. This is compared with a return of minus 20% for Asarco and minus 25% for Cyprus in the past decade. Over 15 years, Phelps Dodge has produced a shareholder return of 1,024% versus 25% for Asarco and 102% for Cyprus.
If Phelps Dodge is successful in acquiring both companies, it would then become not only the largest publicly traded copper company in the world, as billed in the Asarco-Cyprus merger; it would become the world’s largest producer of the red metal, with projected output of 3.8 billion lbs. and reserves of 80 billion lbs.
Phelps Dodge would target average cash costs at US50 cents per lb., with total costs coming in at US60 cents per lb. The merger would also consolidate most of the copper mines in the southwestern U.S., with a strong emphasis in Chile and Peru as well.
The 3-way combination would be immediately accretive to Phelps Dodge’s cash flow, as well as accretive to earnings and earnings per share by the second year after closing.
Phelps Dodge expects to see significant cost savings if the proposed combination proceeds. Through reductions in general and administrative expenses, operating improvements and efficiencies in exploration, the company expects to save more than US$200 million per year — US$50 million more than Asarco and Cyprus. Phelps Dodge would also see savings of US$65 million per year in lower depreciation charges.
The company would close offices in New York, N.Y., Denver, Colo., and Tempe, Ariz., and concentrate management at its headquarters in Phoenix.
The company also suggested it would consider selling off certain non-core assets, particularly its 30% interest in
Industry analysts greeted the
3-way proposal positively, sending the share prices of each up. Vahid Fathi, metals and mining analyst with ABN AMRO in Chicago, called the deal a bold move for Phelps Dodge, stating that consolidation is necessary in what he sees as a protracted disinflationary environment.
Thomas McNamara, analyst for CIBC World Markets, sees the Phelps Dodge deal as more positive than the 2-way merger, citing Phelps Dodge’s successful track record.
Merrill Lynch, which is representing Cyprus, concedes there is a short-term benefit in the Phelps Dodge proposal. However, it remains convinced that the Asarco-Cyprus deal would add more to long-term shareholder value.
While Asarco and Cyprus have rejected Phelps Dodge’s offers, they also set the date for shareholders of record on Aug. 25. The transaction should be consummated on Sept. 30. This does not give Phelps Dodge much time. As it is, the company has not yet made a formal offer to the shareholders and hopes that the more lucrative proposal will make shareholders rethink the Asarco-Cyprus merger. Phelps Dodge would not discuss what steps it plans to take, except to say it will forgo detailed due diligence.
The proposed transaction, as well as the Asarco Cyprus merger, is subject to approval under the Hart-Scott-Rodino anti-trust act. Industry analysts are saying the Phelps Dodge deal may have trouble clearing the anti-trust hurdle, given that the the company is already a dominant producer of rod, wire, and cable from its subsidiary, Phelps Dodge Industries. Picking up Asarco and Cyprus could reduce competition even though neither company is a significant supplier of these products.
Phelps Dodge currently has 58 million shares outstanding. With completion of the 3-way deal, its outstanding shares would climb to 102 million shares.
The Asarco-Cyprus transaction comes with a US$45-million break-up fee, paid by the party exiting the deal.
If Phelps Dodge succeeds in breaking up the deal and acquiring the two companies, its board of directors will have room for only one chief executive, Yearley says.
Recently, Asarco and Cyprus agreed to merge under the name Asarco Cyprus (T.N.M., July 26-Aug. 1/99), with the board of directors composed of members from both companies.
Asarco shareholders would trade in their shares for the new company on a 1-for-1 basis, while Cyprus shareholders would receive 0.765 share of Asarco Cyprus. Initially, the merged company would be based in New York, N.Y., though it would later move its offices to New Jersey, with operations managed from Tempe.
The consolidation proposals come amid hard times brought on by oversupply of the red metal. The price dipped to as low as US63 cents per lb. in the second quarter.
Phelps Dodge posted a loss of US$58 million (or 99 cents per share) for the recent 3-month period, including a writedown of US$61 million. The company issued pink slips to 1,600 employees and cut copper production by 150 million lbs.
Asarco, which also posted a quarterly loss, cut its production by 50 million lbs. Cyprus managed to resist cutting production.
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