Fifteen-Percent Share
The combination of Phelps Dodge, Asarco, and Cyprus Amax would represent about 15 percent of the world's copper-producing capacity, according to Thomas McNamara, an equity analyst at CIBC World Markets, in New York. "It would not be an OPEC, but it should have an influence on the copper market," he says. The three companies have a capacity of 800,000 metric tons. Since the world market now has excess capacity of 200,000, the three companies, if combined, "could take the world market from surplus to deficit" by cutting its capacity, McNamara says. This, in turn, would stabilize prices, he adds.
Attracted to new mining assets, Phelps Dodge had been eyeing Asarco and Cyprus Amax some time before making the bid, according to Peru. He insists that Phelps Dodge does a better job than others in the industry of managing its assets by avoiding over-investment at the peak of the cycle, thereby keeping the company profitable for shareholders throughout the volatile copper cycle. The same expertise could be applied to the assets of Asarco and Cyprus Amax, Peru says.
"We're one of the few mining companies that has earned our cost of capital for the last 10 years," he says. Over 15 years, claims Peru, Phelps Dodge has delivered total returns to shareholders of 1,024 percent, in contrast to 25 percent for Asarco and 102 percent for Cyprus Amax.
Resistance centered on the question of valuation. Phelps proposed to pay a 30 percent premium over the share prices that existed prior to the agreement between Asarco and Cyprus Amax. Critics carped that the offer was inherently unfair owing to the market's treatment of low-cap stocks. In the current climate, small companies are out of favor. Although the copper assets in the ground are similar, investors pay higher multiples for Phelps than for its smaller competitors. Some explanation undoubtedly rests in a market leader's efficiencies and clout, but that would become moot once Phelps owned the new assets.
As a consequence of this valuation, Phelps Dodge was "twice as expensive" as its two targets, says Tumazos. Several standard indicators underscored this point, namely share price to book value, share price to cash flow, and share price to earnings.
This differential worked brilliantly for Phelps Dodge, according to analyst Tumazos. Cyprus Amax either held or would soon hold around $1.6 billion in cash for assets sold or being sold, or $17.67 per share. Thus, a $20.54-per- share final price tag would give Phelps mining assets for a mere $2.87 per share. From the outset, this looked like a no- lose strategy.
Public bidding began on August 20, and then followed a dramatic script. On August 25, Asarco and Cyprus Amax spurned the Phelps Dodge bid. Their counteroffer included a $5 a share payout for each new share of the proposed Cyprus Amax company, or about $545 million.
Many analysts had expected Phelps Dodge's offer to prevail over the merger proposal between Asarco and Cyprus Amax. Even so, on September 22, an eager Phelps Dodge raised its offer and threw in $1 billion in cash, offering $25.47 a share for Asarco (including $9 a share) and $19.49 a share for Cyprus Amax, including $6.89 in cash. That translated into $1.01 billion for Asarco and $1.76 billion for Cyprus Amax, for a total of $2.77 billion.
This bid prompted Asarco CEO Francis R. McAllister and Cyprus Amax CEO Milton Ward to agree to meet with Phelps Dodge CEO Douglas Yearley in New York on September 24 . McAllister and Ward lowered their asking price for a three-way merger from the $3.3 billion of a month earlier to $3.1 billion, according to a source familiar with the meeting. Phelps offered a higher undisclosed price above his previous $2.77 billion, but the three parties were unable to close the gap on exchange ratios, the source says.
Next, McAllister and Ward met and decided to seek potential white knights to acquire the two companies, and they divided up a list of potential suitors. According to sources familiar with the meeting, Grupo Mexico, which already owned 10 percent of Asarco, was on McAllister's list of potential merger partners to call.
At McAllister's request, an agent of Asarco placed a call to Grupo Mexico "to see if there would be a time for Asarco's chief executive to talk to their chief executive." Later that day, McAllister received a faxed letter from Grupo Mexico offering an all-cash offer at $26 a share for Asarco. That would place Asarco's valuation at $1.03 billion, just $20 million higher than Phelps Dodge's offer of $1.01 billion.
Phelps was surprised but not blindsided by Grupo Mexico. "We were always aware that there were others who might step in," Peru says. "Grupo Mexico clearly came to the top of that list. So there was no surprise on our part. It did come kind of late in the game, but we were prepared."
Cyprus Amax, left out of the Grupo Mexico offer and unable to find a white knight of its own, turned to Phelps Dodge to continue negotiations. The two companies reached agreement on September 30. A week later, Asarco accepted a sweetened offer from Phelps Dodge. On October 8, however, Grupo Mexico reopened the bidding and Asarco elected to consider it. Phelps Dodge chose to stand firm, pending an earnings release on October 13. When earnings came in ahead of schedule, a resulting 3.4 percent rise in the price of Phelps Dodge shares revived the bid for Asarco
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