Bloomberg News

Plains Traders Bet Well to Force Freeport Bump: Real M&A

April 17, 2013

Plains Exploration & Production Co. (PXP) shareholders are anticipating positive results from an oil well discovery, stoking bets that Freeport-McMoRan Copper & Gold Inc. (FCX:US) will be forced to boost its takeover bid.

Since Phoenix-based Freeport agreed to buy Houston-based Plains in December for about $50 a share in cash and stock, or $6.9 billion, drilling began at Plains’ deep-water Phobos project in the Gulf of Mexico. As analysts expect the well’s results in the next month, traders last week pushed shares of oil-producer Plains as much as 2.7 percent above the mining company’s bid, the most since the acquisition was announced, according to data compiled by Bloomberg.

At the same time, Freeport shares have declined 24 percent as gold and copper prices tumbled, reducing the value of the deal to about $44 a share. Cowen Group Inc. says the odds of success at Phobos are better than 50 percent, and Freeport will likely improve the cash portion of its offer to boost the bid back to $50 a share to secure support from Plains stockholders. While it’s unknown whether the Plains shareholder vote or the Phobos results will come first, some investors have already filed lawsuits to block the transaction.

Phobos “could be a life-altering find,” Steve Gerbel, founder and president of Chicago Capital Management LP, a Chicago-based hedge fund focused on merger arbitrage, said in a phone interview. If “you were Freeport, you’d try to do everything you could to get this deal done before that well comes in. I don’t think the shareholders are going to let that happen.”

Phobos Project

Hance Myers, a spokesman for Plains, said the company doesn’t comment on speculation. Freeport’s Eric Kinneberg also declined to comment, when asked if the company would raise its offer.

Plains said that its 50 percent stake in the Phobos project may hold the equivalent of 306 million barrels of oil, according to a September presentation. Anadarko (APC) Petroleum Corp., the well operator, controls 30 percent, while Exxon Mobil Corp. owns the rest.

Anadarko began drilling the well in December and said it would take about 120 days to finish. Phobos well results may be available by May 6 (APC), when Anadarko is scheduled to report first- quarter earnings, Doug Leggate, a Houston-based Bank of America Corp. analyst, wrote in an April 12 note to clients. Anadarko considers the prospect “high risk,” with a 1-in-4 chance of commercial success, Leggate wrote.

John Christiansen, a spokesman for Anadarko, based in The Woodlands, Texas, didn’t return phone messages seeking comment.

‘Huge Wildcard’

Plains shareholders are also waiting to hear when they will vote on the Freeport deal. Freeport needs majority support.

“It’s a huge wildcard,” Nicholas Pope, a New York-based analyst at Cowen, said in a phone interview. “It’s tough to have a vote right before we would hear news” about Phobos.

Freeport will likely offer more cash to Plains investors to boost the value of the bid back up to $50 a share and secure a vote in favor of the deal, Pope and fellow Cowen analyst Anthony Rizzuto wrote in a report dated April 5.

Keith Moore, an event-driven strategist for Stamford, Connecticut-based MKM Partners LLC, estimates that more than 30 percent of Plains holders bought the stock on a bet that the Phobos results will lead to a higher bid from Freeport.

“People are anticipating that, should the numbers on this well come in really positive, they’ll have to revise the terms,” Moore said in a phone interview. “If they try to have the vote ahead of the information on the well, those people are likely to make a stink.”

‘Enormous Diamond’

While he said it’s impossible to determine the value of Phobos right now, Gerbel at Chicago Capital said he owns Plains shares and is wagering the well will translate into an upside of “several dollars.”

“It’s sort of like you’re walking down the street and you find what appears to be an enormous diamond,” Gerbel said. “You’re pretty sure it is a diamond, but you don’t know the quality.”

Freeport, the world’s largest publicly traded copper producer, said Dec. 5 that it agreed to buy Plains for $25 in cash and 0.6531 share of Freeport for each Plains share, totaling about $50 a share at the time.

In conjunction with the Plains takeover, Freeport also said the same day that it’s acquiring New Orleans-based McMoRan Exploration Co. (MMR:US), a company that was spun off from Freeport- McMoRan Inc. 19 years ago. For that company, it’s paying $14.75 a share in cash, in addition to giving shareholders a stake in a royalty trust to benefit from future production.

Oil, Gas

The two takeovers will expand Freeport, which got almost 80 percent of its $18 billion of revenue last year from copper, into a global natural resources giant with access to oil and gas deposits onshore and in the U.S. Gulf of Mexico.

Freeport shares plunged 16 percent, the most in four years, the day the acquisition offers were disclosed as shareholders punished the mining company’s return to oil and gas. The stock is still down 24 percent as prices of its two primary commodities tumbled. Copper futures reached an 18-month low on the London Metal Exchange April 15, after weaker than expected economic growth in China, while gold has dropped 17 percent this year on the Comex in New York and is headed for its first annual decline in 13 years. Freeport is scheduled to report earnings tomorrow.

Declining Value

Because of Freeport’s falling stock price, the value of the bid for Plains slid to $44.10 a share as of yesterday. Plains shares closed yesterday 1.6 percent higher than that level, and the stock has traded above the value of the bid every day since March 15, data compiled by Bloomberg show, signaling traders are waging on improved deal terms.

“They are really stealing the company at this price,” Laurence Balter, chief market strategist at Oracle Investment Research, said in an April 12 phone interview from Fox Island, Washington. “It’s unfortunate Freeport shares have not recovered. They may have to sweeten it up a little bit.”

Freeport may need to increase its offer for Plains by about $1 billion, Balter said, equating to a bump of about $7.75 a share. Plains shareholders may not want to own Freeport stock after the recent underperformance, he said.

Today, shares of Plains fell 2.1 percent to $43.87, while Freeport shares declined 4.3 percent to $28. That left Plains shares still valued about 1.3 percent more than the offer.

Freeport investors wouldn’t react well to an increased offer, given that the deal was unpopular to begin with, said Rick de los Reyes, who helps manage about $1 billion at Baltimore-based T. Rowe Price Group Inc., which owned Freeport shares as of Dec. 31.

Not ‘Prudent’

“To increase the offer and potentially have to take on even more debt at a time of instability in copper and gold prices is probably not a prudent move and would not be looked on favorably by shareholders,” he said yesterday by phone.

Still, investors sued both McMoRan and Plains in a series of lawsuits in Delaware Chancery Court in Wilmington alleging directors of McMoRan and Plains violated their duties to get the best price for the companies. A preliminary injunction hearing to block the buyouts under their present terms is scheduled for May 1 in Wilmington before Judge John Noble, according to court papers.

“There was already a lot of conflict and dissent about this deal,” Cowen’s Pope said. “Regardless of what happens there’s going to be angry shareholders. It feels like it is lining up in real near proximity to each other -- the Phobos progress and the vote.”

The cases include In Re. McMoRan Exploration Co. Stockholder Litigation (Consolidated), C8132-VCN; and In Re. Plains Exploration & Production Co. (PXP:US) Stockholder Litigation (Consolidated), CA8141-VCN, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Liezel Hill in Toronto at lhill30@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Susan Warren at susanwarren@bloomberg.net


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