Whisler's assertion that Phelps would benefit from having previous acquisition-integration experience raised Rizzuto's eyebrows. As rare as three-way mergers are, points out Rizzuto, Phelps had tried another one in 1999: simultaneous hostile bids for Cyprus Amax Minerals Co. and Asarco Inc., totaling $2.77 billion. Phelps did manage to snare Cyprus Amax, but a bidding war developed for Asarco, and Grupo Mexico SA's all-cash bid eventually won the day. The Cyprus Amax deal that went through increased Phelps's leverage sharply, Rizzuto notes. "Now, it's taking on all this debt again, after it's worked so hard to pay the debt down," he said before the Falconbridge deal fell through.
One That's Working
Another attempt at a three-way deal in recent years involved aluminum makers Alcan, Pechiney, and Algroup, of Canada, France, and Switzerland, respectively. That $19 billion (in assets) deal was blocked by European regulators on antitrust grounds. Antitrust wasn't the problem for Phelps's three-way, which cleared such hurdles in both the United States and Canada.
For a three-way to sail smoothly, it helps if it is simple and not complicated by preexisting hostile bids. Within a few days of the Phelps/Inco/Falconbridge proposal, Houston-based Anadarko Petroleum Corp. offered $21.1 billion to buy rival oil and natural-gas producers Kerr-McGee Corp. and Western Gas Resources Inc. in two friendly deals.
Anadarko is paying special attention to explaining its plan for reducing debt from the $24 billion in financing it receives from UBS, Credit Suisse, and Citigroup. Issuing equity and selling assets "will produce a net $15 billion of proceeds to take down the debt," Anadarko CFO Al Walker told analysts, with other proceeds coming from the "very free, cash-flow-rich situation" involving the two acquisitions.
With the cost of acquisition-related growth these days comparing favorably with exploration growth, it is not surprising that so many natural-resources deals are cropping up. "There will continue to be lots of M&A activity," says analyst Rizzuto, "from alumina through zinc."
Roy Harris is a senior editor at CFO.
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