Three-Way: The Morning After

Phelps Dodge's failed menage a trois with Inco and Falconbridge made all three companies look attractive to other suitors. Here's the latest on who...
Roy HarrisSeptember 1, 2006

If the dream of a three-way merger among Phelps Dodge, Inco and Falconbridge was to forge a metals-industry giant in one neat operation, the reality since the deal fell through has been a series of messy fights involving all three pieces.

It has gotten messier by the week since the holders of Falconbridge Ltd., a major nickel producer, rejected the friendly three-way with copper-miner Phelps and nickel-miner Inco in late July.

The cleanest fallout was the purchase of Falconbridge by Swiss mining company Xstrata PLC, which previously had owned 25 percent, for $17 billion in cash. (The three-way had proposed cash and stock.)

Inco, however, had agreed to a “standard” two-way merger with Phelps even if the Falconbridge piece fell through. The value of the two-way varied widely as Phelps shares fluctuated to reflect both copper’s volatile price and investor swings — from delight at the three-way being off, to dismay when the Phelps-Inco portion appeared to be on.

In Inco’s case, however, Phelp’s competition stiffened right away, consistent with an acquisition market rife with activity among natural-resources companies in general.

Vancouver-based zinc producer Teck Cominco Ltd., which may have provoked June’s three-way in the first place with its initial bid for Inco, raised its cash-and-stock offer to compete with the Phelps-Inco deal. Phelps responded with an increase of its own.

While still in an agreement with Phelps, Inco in early August opened talks with Teck. Then, Brazilian company Comphania Vale do Rio Doce (CVRD) entered the fray with an all-cash bid that competed with both Phelps’s and Teck’s. In mid-August, Teck withdrew.

Terms of the Phelps-Inco arrangement called for Inco to take a stand on any competing bids by Tuesday, August 29. On that day, Inco issued a press release supporting Phelps’s friendly cash-and-stock bid, and recommending that holders reject the CVRD bid.

That might strike some observers as odd: As of Tuesday, CVRD’s bid was being valued at $17.4 billion, slightly higher than the Phelps-Inco cash-and-stock terms.

Inco holders will vote on the Phelps-Inco proposal Sept. 7, with Phelps holders voting Sept. 25. But to add even more confusion, the Canadian agency that must rule on foreign acquisitions is not expected to issue a ruling on either proposal until later in the month.

And then there has been the question of outside interest in Phelps Dodge itself. Analysts thought that was a possibility when its stock price fell to around $75 after the initial three-way bid in June. There has been less talk in August, though, with its shares trading between $85 and $92.