$17.8 billion – Amount of the hostile bid for Inco
27.8% – Premium over Inco’s 30-day, average share price on the TSX
5th – Global rank of the new mining entity by sales
With its own $12-billion bid for Falconbridge (FAL.LV-T, FAL-N) hung up on regulatory reviews in the United States and Europe, Inco (N-T, N-N) now finds itself the target of a $17.8-billion hostile bid from cash-rich diversified miner Teck Cominco (TEK.SV.B-T, TCKBF-O).
The move comes just two weeks after Teck Cominco president and CEO Donald Lindsay told analysts during a conference call to discuss his company’s first-quarter earnings: “We’re continuing to look at opportunities, large and small, but with (metal) prices moving up so quickly, it tends to make you cautious.”
Teck is offering Inco shareholders $78.50 in cash or 0.9776 of a Teck Cominco class B subordinate voting share plus, fittingly, a nickel for each Inco share. Assuming full pro ration, the offer boils down to $28.00 in cash accompanied by 0.6293 of a share. Teck has limited its cash outlay to $6.36 billion, with a maximum of 143 million shares up for grabs.
The bid represents a premium of 27.8% over Inco’s 30-day, volume-weighted average share price on the Toronto Stock Exchange. It is also a 20% premium over Inco’s recent all-time high share price.
In a brief statement, Inco said it would review Teck’s formal offer once it was received, and issue a statement in due course.
“Inco remains committed to its friendly, value-creating transaction with Falconbridge and to meeting its obligations under the support agreement with Falconbridge,” the company concluded.
Falconbridge echoed Inco’s sentiments in its own statement.
“We are surprised that Teck Cominco has taken this step to interfere in our transaction and will review the implications of what they have done,” said Falconbridge chief executive Derek Pannell.
Lindsay said Teck’s offer is better than the proposed merger of Inco and Falconbridge, as it provides a premium for Inco shareholders rather than Inco paying a premium to acquire Falconbridge.
“Our offer presents an attractive opportunity for Inco’s shareholders in comparison to the Inco-Falconbridge transaction,” he said. “Market sentiment indicates that the price required to ultimately acquire Falconbridge may be materially higher than the current Inco bid.”
On May 5, the last business day before Teck announced its bid for Inco, Falconbridge shares closed at $47.23 in Toronto; that compares with a value of just $41.76 for the shares under Inco’s fully pro-rationed bid.
The company resulting from Teck’s plan would have a stronger balance sheet and greater diversification, Lindsay said. Adding that the market would ultimately reward shareholders with higher multiples — higher than either company could attain on its own — and leading positions in several commodities would also reduce the volatility in earnings and cash flow.
Meanwhile, existing Teck shareholders would benefit from the addition of a portfolio of long-life, low-costs assets, Lindsay argued. “That’s exactly what our shareholders have been asking us to do with our substantial cash balance.”
And Lindsay doesn’t plan to sell off any of those newly acquired assets, as they would help provide strong, stable, and internally funded cash flow growth, precluding the need to issue any shares to fund projects.
If successful, the proposed marriage is expected to be immediately accretive to cash flow and earnings per share. Teck recently posted record first-quarter net earnings of $2.19 per share (on net earnings of $448 million), more than double that of a year ago, and a new record for the typically weak first quarter. Inco saw its earnings per share slip by 23% to $1.04 per share. Net earnings fell 36% to US$202 million on higher production costs.
Teck’s offer is conditional on Inco withdrawing its offer for Falconbridge without any shares having been taken up; the support agreement between the two must also be torn up. The bid is open for 60 days, and requires that at least 66.67% of Inco’s fully diluted shares be handed over. Thereafter, Teck would move to acquire the remaining shares.
Greater diversification
A Teck-Inco union would entrench Teck as the world’s largest zinc miner, and boost it to second-largest nickel miner, and a major player in the metallurgical coal market.
“This is a strategic move into nickel, and Inco has some of the best nickel assets in the world,” Lindsay said.
The enlarged company would also rank as the largest producer of indium, and hold a significant position in the copper, gold, and silver markets. It would be an important producer of platinum, palladium, cobalt, molybdenum and specialty metals. Teck also has a toehold in the Alberta oil sands industry, with a 15% stake in the Fort Hills project, near Fort McMurray.
The new Teck head office would be in Vancouver, with the two existing offices in Toronto merged to focus mostly on marketing. Teck said it plans to retain a large portion of Inco’s senior management and employees.
In all, the enlarged company would sport a market capitalization of around $35 billion. The $17.8-billion price tag would make this the mining industry’s biggest takeover yet.
“The pairing of these two great mining companies will create a very strong Canadian-based global mining company. The new Teck Cominco would become the largest North American diversified mining company,” Lindsay added.
Teck had discussed the idea of joining forces with Inco last year, before Inco launched its bid for Falco in October, but those talks proved fruitless.
Lindsay said his company initially expects to generate annual savings of more than $150 million via administrative and operating synergies. By comparison, Inco expects annual savings of $350 million to arise by mid-2008 from its absorption of Falconbridge.
Questioned on the gap in potential savings between the opposing transactions, Lindsay responded that his estimates were very conservative.
He also sees substantial upside from employing an innovative hydrometallurgical process developed by the company’s Cominco Engineering Services (CESL) division at Inco’s Voisey’s Bay and Thompson nickel operations. The CESL process has already been successfully employed to produce cathode nickel from Voisey’s Bay ore. Savings are forecast in the hundreds of millions of dollars.
Savings of up to another $75 million could be found by working with Falconbridge in the Sudbury, Ont. area following completion of the planned transaction, he added.
Asked if he would consider a 3-way deal including Falconbridge, Lindsay said he wouldn’t speculate but was always open to talks.
Teck Cominco plans to finance the cash portion of its offer with $3.2 billion in cash on hand, bolstered by existing bridge loan facilities.
Teck already owns around 8.9 million Inco shares, including 5.1 million shares pledged as security for Teck Cominco’s outstanding Inco exchangeable debentures due in 2021. Inco currently has around 193.4 million shares outstanding.
With less overlap between the two company’s operations, the deal could face an easier time with regulators than the proposed Inco-Falconbridge deal. Inco has extended its bid for Falconbridge three times, currently until June 30, to allow time for regulators to thoroughly review and approve the plan.
The U.S. Department of Justice and the European Commission are concerned over the enlarged entity’s dominant position in the high-grade nickel market. Such nickel is used in nickel plating and in superalloys, which are employed in high-tech products such as the rotating parts of jet engines. The Department of Justice is expected to deliver its verdict by the end of April. A decision from European Commission could come as late as August.
Xstrata factor?
Teck Cominco’s bid also comes around a week before the expiry of a top-up clause included i
n Xstrata’s (XSRAF-O, XTA-L) acquisition of the bulk of its 20.01% stake in Falconbridge from the former Brascan for around $2 billion. Brascan is now Brookfield Asset Management (BAM.LV.A-T, BAM-N).
Xstrata would have to top up the compensation paid to Brascan if it goes for the rest of Falconbridge’s shares at a price higher than its original price of $28 per share before mid-May.
Lindsay said he had not had any contact with Xstrata since Inco launched its bid for Falco in October, and that as far as he knew, the Swiss-based miner had no knowledge of Teck’s planned acquisition.
“I have no idea what they will do,” he said.
“It is clear that consolidation of the Canadian mining industry is under way. Decisions on how best to consolidate the industry are going to be made in the next few weeks, and we think they should be made by shareholders who have all of the options before them.”
Shares in Inco ended $9.45, or 14.5% higher, at $74.83 in Toronto following the news on May 8; Teck Cominco was off $3.78, or 4.7%, at $76.47. For its part, Falconbridge was $3.15 or 6.7% better at $50.38. With Falconbridge perhaps back in play, shares in Swiss-based Xstrata ended 111 pence or 4.9% higher at 2,365 pence in London.
While Teck intends to apply for listing on the New York Stock Exchange once its acquisition wraps up, it has no plans to restructure its dual class of shares. On April 18, there were more than 199.1 million class B shares and nearly 4.7 million class A shares outstanding.
In related news, Moody’s Investors Service says that Teck Cominco’s ratings are under review for possible downgrade. Moody’s said that if the proposed deal goes ahead as planned, Teck’s Baa2 ratings would be confirmed with a stable outlook.
Teck Cominco was created in 2001 after Teck acquired its 50%-owned subsidiary, Cominco, for $1.5 billion, or a 21% premium. The pair had shared management and corporate philosophies for 15 years.
Mining Companies by Market Capitalization (including debt)
Company | C$B | US$B |
Anglo American | $77.4 | $69.9 |
Rio Tinto | $72.0 | $65.0 |
BHP Billiton | $61.3 | $55.4 |
CVRD | $46.5 | $42.0 |
Alcoa | $33.8 | $30.5 |
Barrick Gold | $32.6 | $29.4 |
Xstrata | $31.1 | $28.1 |
Newmont Mining | $26.1 | $23.6 |
Alcan | $22.4 | $20.2 |
Phelps Dodge | $21.3 | $19.2 |
Falconbridge | $17.6 | $15.9 |
Teck Cominco | $16.0 | $14.5 |
Inco | $12.6 | $11.4 |
SOURCE: TSX, LSE, NYSE, BOVESPA
T.N.M. Nugget
TECK COMINCO OFFER FOR INCO
TECK’S OFFER:
$78.50 in cash or 0.9776 of a class B share plus 5 per share Maximum cash available: $6.36 billion Maximum shares: 143 million shares
CONDITIONS:
Inco withdrawing its offer for Falconbridge 66.67% of Inco’s shares being tendered
TECK’S ASSETS:
Attributable zinc reserves: 178.2 million tonnes grading 7.9% zinc;
255 million tonnes of clean coal reserves total assets worth $8.8 billion
REVENUE:
2005 revenue of $4.4 billion
7,100 employees at 9 operations in North and South America
INCO’S ASSETS:
Total sulphide reserves: 163 million tonnes grading 1.22% nickel, 1.32% copper, and 0.04% cobalt, plus less than a gram each of platinum, palladium and gold.
Laterite reserves: 147 million tonnes averaging 1.8% nickel.
total assets worth $12 billion
REVENUE:
2005 sales revenue of $4.6 billion
10,000 employees at operations from northern Manitoba to the South Pacific
Company Histories
Teck Cominco
The Consolidated Mining and Smelting Co. of Canada was started in 1906 by merging several units controlled by the Canadian Pacific Railway. The company became Cominco in 1966. Cominco’s core operation, the Sullivan mine in Trail, B.C., which started production 1909, operated until 2001, when reserves were exhausted.
Teck began as Teck-Hughes Gold Mines in 1913 in order to develop a gold discovery at Kirkland Lake, Ont., by prospectors Sandy McIntyre and James Hughes. The Teck-Hughes mine was in production for 50 years before closing in 1965. The Beaverdell mine, purchased by Teck in 1969, went as far back as 1898 and produced silver until its closure in 1991.
The association between Teck and Cominco started in 1986 when Teck and two industry partners acquired a share of Cominco from Canadian Pacific. The two companies merged in July 2001.
Inco
In 1902, under the guidance of Robert Thompson, a copper magnate at the time, seven companies — Canadian Copper Co., Orford Copper Co., Anglo-American Iron, American Nickel Works, Nickel Corp., Vermilion Mining Co. of Ontario, Societe Miniere Caledonienne of New Caledonia — were merged to form International Nickel Co. Thomson served as the new entity’s first chairman and Ambrose Monell as its president. In 1903, the company built an office in present-day Copper Cliff, Ont. The building still stands, but now houses a barber shop.
In 1929, The Mond Nickel Co., owner of the Victoria, Little Stobie, Garson and Levack nickel mines in Sudbury, Ont., as well as a carbonyl-refined nickel process — variations of which are still used at Inco today — was folded into International Nickel Co.
The company was formally named Inco in 1974.
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