Freeport-McMoRan Copper & Gold Inc. (FCX:US), the world’s largest publicly traded copper producer, is paying $9 billion in cash and stock for two U.S. oil and natural gas companies that will expand it into a global natural resources giant.
Investors questioned the company’s decision to get back into the oil and gas business 18 years after its operations were split between metals mining and fuel production. Freeport, based in Phoenix, fell the most in more than four years after announcing the plan to buy Plains Exploration & Production Co. (PXP:US) and McMoRan Exploration Co. (MMR:US)
“Clearly the synergies between putting a mining company and an oil exploration and production company together remain to be seen,” said Kuni Chen, an analyst at CRT Capital Group LLC in Stamford, Connecticut, who has a hold rating on Freeport.
The deal would give Freeport access to oil and gas deposits onshore and in the U.S. Gulf of Mexico. Houston-based Plains spent $6.1 billion for Gulf assets owned by BP Plc (BP/) and Royal Dutch Shell Plc (RDSA) in September. McMoRan, a company that was spun off from Freeport-McMoRan Inc. in 1994, declined 34 percent over two days last week after reporting continuing problems with its Davy Jones well in the Gulf.
Freeport dropped 16 percent to $32.16 at the close in New York, the biggest decline since December 2008. Plains surged 23 percent to $44.50 and McMoRan jumped 87 percent to $15.82, the biggest gains for both companies since they began trading publicly.
“Congratulations on making one of the worst teleconferences I’ve ever heard to justify a deal,” Evy Hambro, manager of BlackRock Inc.’s $12 billion World Mining Fund, told Freeport Chief Executive Officer Richard Adkerson on the company’s conference call today. “I haven’t heard anything on this call that in any way justifies why these companies should be put together.”
Shareholders should get to vote on the deals, said Hambro. BlackRock held 3.1 percent of Freeport as of Sept. 30, according to data compiled by Bloomberg.
The amount of Freeport stock used as payment isn’t sufficient to require a vote by shareholders, Adkerson said.
Freeport will pay about $50 a share in cash and stock for Plains, representing a takeover premium of about 39 percent based on the company’s closing share prices yesterday, according to a statement today. Holders of McMoRan will get $14.75 in cash and 1.15 units of a royalty trust for each share.
The structure of the transaction means McMoRan shareholders won’t get the “big, huge reward” they’ve been waiting for as the New Orleans-based company develops ultra-deep wells in the shallow waters of the Gulf, said Joan Lappin, New York-based chief investment officer for Gramercy Capital Management. Instead, they will receive cash and participation in a trust that may be capped in value.
“I have been a true believer that this play is enormous and I am sure -- I have no doubt -- that it will accrue great benefit,” Lappin said in a phone interview. “But it isn’t going to go to me, it’s going to go to the shareholders of Freeport.”
McMoRan is seeking to pioneer ultra-deep production with Davy Jones, a well off the coast of Louisiana that descends 29,000 feet (8,800 meters). Complications have repeatedly delayed the project since late 2011. The company said on Nov. 26 it has been unable to unclog the well to allow for a flow test to determine viability.
McMoRan holders should be “thrilled” by the Freeport offer, said Leo Mariani, an analyst at RBC Capital Markets in Austin, Texas who doesn’t own Plains or McMoRan shares. “At the end of the day, they’ve yet to produce any gas from the ultra- deep shelf or prove that they can.”
Plains, which was spun off from Plains Resources Inc. in 2002, has assets in the Gulf of Mexico, California, Texas and Louisiana. Annual production has increased 58 percent from 2007 to 2011.
The company’s share price performance has lagged competitors. During the past five years, Plains fell 28 percent, compared with an 17 percent drop in the Standard & Poor’s Energy index. The company’s Gulf purchases from BP and Shell have it poised to grow again, Curtis Trimble, an analyst at Global Hunter Securities LLC in Houston, said in a telephone interview.
The combined company may generate earnings before interest, taxes, depreciation and amortization of about $12 billion and operating cash flows of $9 billion in 2013, Freeport said. Freeport’s reported Ebitda for the past 12 months was $6.88 billion, according to data (FCX:US) compiled by Bloomberg.
Freeport operates mines in Indonesia, Africa and the Americas. CEO Adkerson said in April that the company plans to increase annual copper output by more than 25 percent in the next three years through expansions in Peru, the U.S. and the Democratic Republic of Congo. Freeport posted third-quarter net income of $824 million on $4.42 billion in sales.
Freeport and McMoRan have maintained ties since splitting in the 1990s. The companies share six (FCX:US)board members (MMR:US), including McMoRan CEO Jim Bob Moffett, who serves as Freeport’s chairman. B.M. Rankin, co-founder of McMoRan with Moffett, serves as vice chairman of both boards.
Plains CEO James Flores is on the board of McMoRan because his company owns a 31.5 percent stake. He stands to gain more than $150 million from the deal, including payment in restricted shares, according to a Plains regulatory filing from April.
Under the new structure, Moffett will continue as chairman and Rankin will remain vice chairman. Adkerson will stay as CEO and also be appointed vice chairman. Flores will be vice chairman and head the company’s oil and gas operations.
Freeport received $9.5 billion of financing commitments from JPMorgan Chase & Co. to fund the cash portion of the two deals and to repay debt owed by Plains.
Credit Suisse Group AG was financial adviser to the special committee of Freeport’s board, providing fairness opinions on both the deals. Wachtell, Lipton, Rosen & Katz acted as legal adviser. Evercore Partners Inc. provided financial advice to the special committee of the McMoRan board, while Weil, Gotshal & Manges LLP served as legal counsel. Barclays Plc acted as financial adviser to Plains and Latham & Watkins LLP was its legal adviser.
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