Teck targets Inco, sans Falco

With its own 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 Cdn$17.8-billion 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 Don 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.”

Under the deal, Teck Cominco is offering Inco shareholders Cdn$78.50 in cash or 0.9776 of a Teck Cominco class B subordinate voting share plus, fittingly, a nickel for each of their Inco shares.

Assuming full pro ration, the offer boils down to $28 in cash accompanied by 0.6293 of a Teck Cominco class B subordinate voting share. Teck Cominco 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 price on the Toronto Stock Exchange.

In a brief statement of its own, 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.

Teck’s offer is conditional on Inco withdrawing its offer for Falconbridge without any shares having been taken up, and the support agreement between the two being axed. It also requires that at least 66.67% of Inco’s fully diluted shares be tendered; thereafter Teck Cominco plans to acquire the remaining shares.

Inco’s friendly deal with Falconbridge deal includes a US$320-million break fee payable by Falconbridge, should it accept a superior offer. Inco retains the right to match any offer.

Teck Cominco’s planned acquisition of Inco would create the world’s largest zinc miner, second-largest nickel miner, and a major player in the metallurgical coal market. It would rank as the world’s largest producer of indium. It would also hold a significant position in the copper, gold, and silver markets, and be an important producer of platinum, palladium, cobalt, molybdenum and specialty metals. Teck Cominco has recently obtained a toehold in the Alberta oil sands industry.

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.

Teck Cominco said it had approached Inco about a union last year before the proposed Inco-Falconbridge transaction was announced, but that the talks had proven fruitless.

“Our offer presents an attractive opportunity for Inco’s shareholders in comparison to the Inco-Falconbridge transaction,” said Lindsay. “Market sentiment indicates that the price required to ultimately acquire Falconbridge may be materially higher than the current Inco bid.”

Lindsay said his company initially expects the union 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.

Teck Cominco plans to finance the cash portion of the offer with cash on hand bolstered by an underwritten bridge facility. The company recently posted record first quarter net earnings of $448 million, and has $3.2 billion in cash.

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 has faced. Inco has extended its bid for Falconbridge three times, the current extension to 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 in Xstrata‘s (XTA-L, XSRAF-O) 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.

Shares in Inco were up $11.08, or nearly 17%, to $76.46 in late-morning trade in Toronto following the news on May 8; Teck Cominco was off $3.35, or 4.2%, at $76.90. For its part, Falconbridge was $2.96, or 6.3%, better at $50.19. With Falconbride perhaps back in play, shares in Swiss-based Xstrata ended 101 pence, or 4.5%, higher at 2,355 pence in London.