Falconbridge sticks with Inco

Canada’s long-running takeover soap opera seems to be finally drawing to an end, and it looks like the Swiss-born interloper will succeed in spoiling the nuptials with shares in Falconbridge (FAL-T, FAL-N) generally trading at or near Xstrata’s (XSRAF-O, XTA-L) offer price.

The latest version of Xstrata’s bid, increased on July 19, rings in at $62.50 in cash, and no longer carries a minimum acceptance level; it expires on Aug. 14.

Industry Canada recently approved the bid after an extended period of review, removing the last major regulatory hurdle facing the offer. In obtaining approval, Xstrata confirmed that Falconbridge’s Canadian zinc and copper operations would be managed from Toronto, and the city would be home to Xstrata Nickel — the company’s new stand-alone nickel business. Xstrata also pledged a 3-year moratorium on layoffs among operating staff at any of Falco’s operations in Canada.

The plan still requires shareholder approval, and will be put to Xstrata shareholders on Aug. 14. Xstrata has already locked up the support of Credit Suisse Securities and Glencore International, who together hold around 35.9% of the company’s outstanding shares.

Inco’s (N-T, N-N) “best and final offer” for Falconbridge stands at $18.50 in cash plus 0.55676 of a share, or $64.40 per share, based on Inco’s closing share price on July 24. The bid is backed by Phelps Dodge (PD-N), which has said it will not support another increase.

Inco’s bid, which was set to expire on July 27, has been bolstered recently as investors anticipate an all-out bidding war for Inco — if it loses out on Falconbridge. Shares in Inco have gained more than 7% since Xstrata tabled its most recent offer. Analysts expect the shares would retreat if Inco manages to gain control of Falco. Falconbridge’s shareholders rights plan expires on July 28. Thereafter, Xstrata is free to amass shares on the open market.

Falco’s board continues to support Inco’s offer, touting the potential for value creation and savings the planned union would make.

“One of the primary reasons for the Falconbridge board reaffirming this recommendation is the forecast of extremely solid market fundamentals, especially for nickel and copper,” said Falconbridge CEO Derek Pannell in a statement.

Inco’s bid still faces some uncertainty, as Atticus Capital and Lehman Brothers — major shareholder in Phelps Dodge — have said they intend to vote against the proposed acquisition of Inco, with or without Falconbridge. They have long argued that the transaction is too dilutive and debt-laden. The increase to Phelps’ 3-way plan on July 16 came with an additional US$1.67 billion in debt, to bring the total to nearly US$24 billion.

Inco on the block?

With its bid on the ropes, Inco recently bowed to pressure from Teck Cominco (TCK.B-T, TCK-N), agreeing to drop its shareholders’ rights plan effective Aug. 16. The expiration date allows Inco to fight out its battle with Xstrata. Teck’s appeal of the plan was to have been heard by the Ontario Securities Commission on July 21.

Should Inco fail in its fight for Falco, the termination of the rights plan is expected to trigger a bidding war for the world’s second-largest nickel producer.

Teck has signalled its intention to join in the ensuing frenzy, extending its existing offer of $28 in cash plus 0.6293 of a class B share until Aug. 16. The lack of a sweetener follows Teck’s recent modus operandi, which has been to sit on the sidelines and await a winner in the battle for Falconbridge.

Teck has amended its offer to allow for Inco shareholders to tender for up to 10 days after it first takes up and pays for Inco shares. The bid requires that Inco scrap its planned nuptials with Falco. So far, some 1.35 million Inco shares have been tendered to Teck — or less than 1% of Inco’s 196.4 million outstanding shares.

Phelps, too, has said it intends to acquire Inco regardless of the outcome of the Falconbridge saga. The Arizona-based copper miner is offering Inco shareholders $20.25 in cash accompanied by 0.672 of one of its own shares for each Inco share.

Teck’s bid values Inco’s shares at $69.90 apiece, and Phelps’ offer at $79.06, based on each company’s closing share price in Toronto and New York on July 24.

The two competing bids are not expected to remain alone once Inco’s poison pill expires, with the cast of usual suspects already touted as potential predators. They include Companhia Vale do Rio Doce (RIO-N), Anglo American (AAUK-Q, AAL-L) and Rio Tinto (RTP-N, RIO-L). Mining behemoth BHP Billiton (BHP-N, BLT-L) would probably not enter the fray, as its existing sizeable nickel portfolio would be sure to raise competition concerns. Inco had held talks with several parties before striking its existing 3-way deal with Phelps.

CVRD previously took a run at Noranda, which at the time controlled Falconbridge. Noranda later merged with Falconbridge in 2005 after talks with Chinese parastatal enterprise China Minmetals failed to result in a deal.

Teck would be hard-pressed to keep pace in a bidding war if any of these deep pockets joined in — the company had $3.6 billion in cash and short-term investments at the end of June. Some have suggested the company might sell its gold business or consider partnering up for a bid (the company has an existing relationship with Japanese trading group Sumitomo).

Teck’s bid also suffers from the dual-class nature of its shares, which keeps control of the company in the hands of Teck and Sumitomo. Speculation is that the two-tier structure would be eliminated to make the share exchange more attractive to investors.

“We continue to monitor the progress of the bidding for Falconbridge,” said Teck CEO Don Lindsay in a statement. “As market conditions evolve we will weigh any possible changes in our offer for Inco carefully against other potential transactions, and we remain committed to a disciplined approach to any transaction.”

The company says it is looking at other possible deals in case its bid for Inco fails. These include a foray into the iron ore business, which Lindsay says customers on the coal side have encouraged him to consider.

Fuel for the fire

Falconbridge, Inco and Teck all recently reported record second quarter earnings on the back of soaring metal prices. Falconbridge led the way, more than tripling its earnings from a year ago to US$728 million, or US$1.91 per fully diluted share. Revenue nearly doubled to US$3.95 billion. Inco’s earnings more than doubled to US$472 million (or US$2.11 per fully diluted share) as revenue jumped 52% to US$1.81 billion. Teck nearly trebled its earnings to $613 million ($2.83 a share); revenue climbed by 56% to $1.56 billion.

In a late plea to investors, Inco forecast that its earnings would more than double in the second half of the year as red hot metal markets continue. Falconbridge plans to share its wealth with shareholders via a special dividend of 75 per share. The payout will go to shareholders of record on July 26, and is payable on Aug. 10.