Phelps Dodge to buy Inco, Falconbridge for $40B US

Canadian mining companies Inco Ltd. and Falconbridge Ltd. have reached a three-way deal to merge with Phelps Dodge Corp.of Arizona in what would be the biggest takeover in Canadian corporate history.

The companies said Monday the union would createthe world's largest nickel producer and largest publicly traded copper producer.

The new company will be named Phelps Dodge Inco Corp. Its corporate office and copper division will be headquartered in Phoenix, while Inco Nickel, the new company's nickel division, will be based in Toronto.

Phelps Dodge is offering $80.13 per sharein a combination of cash and stock for a combined Inco and Falconbridge, which are currently working on their ownfriendly merger. Each Inco shareholder would receive 0.672 shares of Phelps Dodge stock plus $17.50 per share in cash for each shareowned.

The Phelps Dodge offer for Inco and Falconbridge is worth $40 billion US.The companies said the offer represents a premium of 23 per cent on Inco's market price as of the close of trading on June 23 and a 19 per cent premium on the value of the unsolicited offer from Teck Cominco Ltd. for Inco.

Inco, Falconbridge stock soars

Shares of both Inco and Falconbridge jumped in Monday trading on the TSX. Inco stock climbed $7.03 to $72.28; Falconbridge stock advanced $2.83 to $58.33. The acquiring company, Phelps Dodge, saw its share price plunge $6.72 to $76.23 US in NYSE trading.

As part of the three-way deal, Inco has agreed to bump up its offer for Falconbridge.Inco said it willincrease the cash component ofits friendlyoffer from $12.50 to $17.50, and the exchange ratio from 0.524 shares of Inco for each share of Falconbridge to 0.55676 shares. The board of Falconbridge has unanimously agreed to recommend Inco's revised offer to its shareholders.

Phelps Dodge will help Inco boost its bid for Falconbridge by buying $3 billion US in Inco convertible subordinated notes.

"Global consolidation within the metals market is red hot as producers deploy coffers of cash from the bull market in metal prices to gain market share and increase production," said Kimberly DuBord of Briefing.com.

The price of nickel jumped $200 US a ton in London trading. Analysts said this shows that Phelps Dodge expects base metals prices to remain high for the foreseeable future.

Inco and Falconbridge, both based in Toronto,are trying to fend off a pair of hostile suitors. Switzerland's Xstrata PLC has made a takeover bid for the 80 per cent of Falconbridge it doesn't already own, while Vancouver's Teck Cominco has made a $17.8-billion bid for Incothat is conditional on Inco abandoning its takeover of Falconbridge.

Phelps Dodge hasindicated that its takeover of Inco is not conditional on the Inco-Falconbridge deal being successful. Some analysts expect Xstrata to increase its offer for Falconbridge.

Global operations

The new Phelps Dodge Inco will have operations in more than 40 countries and employ approximately 40,000 people. The new firmwill be listed on the New York Stock Exchange and will apply for a listing on the Toronto Stock Exchange.

"This is an industry-redefining transaction," said Falconbridge CEO Derek Pannell, who will become the president of Inco Nickel and will head the new company's nickel, zinc and aluminum operations.

J. Steven Whisler, chairman and chief executive officer of Phelps Dodge, will be chairman and chief executive officer of the new company, while ScottHand, chairman and chief executive officer of Inco, will become the new firm's vice-chairman.

When the merger is completed, current Phelps Dodge shareholders would own approximately 40 per cent ofthe new firm, while current Inco shareholders would own approximately 31 per cent, and Falconbridge holders would own approximately 29 per cent.

Companies see $900 million US in annual savings

The companies said theircombined annual cost savings would amount to$900 million US by 2008.More than half the savings would come from the previously announced Inco/Falconbridge deal.

Phelps Dodge has pledged to make nolayoffs in the mining or processing areas at Inco or Falconbridge for at least three years, beyond any workforce cuts that had already been announced. However, some cuts at head office will be made.

"We believe that the transaction will be a net benefit to Canada in many ways, and the combined company will continue to be an active corporate citizen in Canada," Whisler told an analystconference call.

But some analysts said Canadians should be concerned about this latestexodus of a head office from Canada.

"The opportunities for investment bankers, for advertising agencies, for legal professionals … all of these opportunities will be significantly diminished as Inco or Falconbridge head office functions are moved over to the Phelps Dodge facility in Phoenix, Ariz.," Joe D'Cruz of the Rotman School of Management told CBC News Business.

The transaction, which is subject to Phelps Dodge and Inco shareholder approval andregulatory approval, is expected to close in September.

The companies said they do not expect major regulatory problems.

But some analysts said it was too soon to declare to call thisa done deal.

Some market watchers are looking forXstrata to increase its bid for Falconbridge whileTeck Cominco could still top its offer for Inco. And some analysts say Xstrata and Teck Cominco could join forces to acquire Inco and Falconbridge by bidding more thanPhelps Dodge.