Falconbridge refills poison pill prescription (April 03, 2006)

With its planned nuptials with Inco (N-T, N-N) potentially delayed until late summer, Falconbridge (FAL.LV-T, FAL-N) has adopted a new shareholders’ rights plan aimed at preventing a creeping takeover.

Under the plan, which is effective immediately, rights (good for shares at half the going rate) would be triggered by any bid for at least 20% of Falconbridge’s shares. A permitted bid needs to be made to all of Falconbridge’s shareholders.

While Falconbridge didn’t name any names, the plan appears primarily aimed at Swiss-based miner Xstrata (XSRAF-O, XTA-L), which already holds a 20.01% stake in Falconbridge. Xstrata picked up the bulk of its Falco shares from Brookfield Asset Management (BAM.LV.A-T, BAM-N), formerly Brascan, for around $2 billion in mid-August.

At the time, Xstrata CEO Mick Davis said his company did not intend to remain a long-term shareholder with a minority interest. Soon thereafter, Falconbridge adopted a rights plan to thwart a creeping takeover by Xstrata.

More recently, Davis reiterated his company’s stance on the stake during a conference call to discuss his company’s 2005 financial results on March 1.

“And now, for what you’ve been waiting for, I’ll mention the word Falconbridge,” quipped Davis. “Our twenty-per-cent holding of Falconbridge remains a source of value potential for Xstrata.”

Noting the delay in closure of the Inco offer, Davis said Xstrata would continue to assess all the various options open to it.

Under its deal with Brascan, Xstrata would have to top up the compensation paid if it goes for the rest of Falconbridge’s shares at a price higher than $28 per share. At presstime, the shares were trading around $39.90. The expiry of that stipulation in mid-May represents saving of hundreds of millions for a potential Xstrata bid.

A competing bid would also have to absorb a US$320-million break fee payable to Inco should Falco accept a superior offer. Inco retains the right to match any such offer.

Falconbridge says its poison pill plan will not prevent a full-on offer for the company, but will provide “ownership stability” to protect the company’s existing agreement to be taken over by Inco.

That deal is hung up as the U.S. Department of Justice and the European Commission (EC) complete their review of the $12.8-billion plan to create the world’s biggest nickel producer. Canadian regulators have already approved the scheme.

In late February, the EC said it would take up to another 90 business days to study the implications of the deal after its initial investigation raised some serious competition concerns in certain nickel and cobalt markets. The Department of Justice is expected to deliver its verdict by the end of April.

Both regulators are concerned that the combined entity could have too dominant a position in the superalloy and nickel-plating markets, limiting customer choice and increasing prices. The EC fears that the enlarged company could delay development of its large portfolio of greenfield nickel projects to artificially maintain tight supplies and high prices.

Inco previously offered to sell Falco’s Nikkleverk refinery in Norway and certain related marketing businesses (post merger) as a peace offering to regulators, though the nickel giant maintains that the deal should proceed as is.

Inco’s thrice-extended offer of $34 in cash or 0.6713 of one of its own shares accompanied, fittingly, by a nickel for each of Falconbridge’s outstanding shares, now expires at the end of June.

The cash portion of the offer is capped at $2.87 billion and the share issuance is limited to 201 million shares.

The bid is subject to at least two-thirds of Falconbridge’s fully diluted shares being tendered. Thereafter, Inco would have to acquire all remaining shares under the same terms.

Falconbridge’s rights plan is subject to regulatory approval, and must be OK’d by shareholders within six months.

Shares in Falconbridge were 72 higher at $39.90 in afternoon trading in Toronto on March 22, following the plan’s adoption after markets closed on March 21; Inco was $1.81 better at $55.90. Shares in Xstrata advanced 33 pence to 1,795 pence on the London Stock Exchange.