Freeport-McMoran Lured in Equinox Lowball Lundin Bid: Real M&A
Lundin, a Toronto-based copper and zinc producer, was 1.5 percent above Equinox’s average cash-or-stock offer of C$7.80 a share as of today, signaling traders who bet on mergers and acquisitions expect a competing bid. Equinox, owner of Africa’s largest copper mine, made its unsolicited C$4.6 billion ($4.7 billion) proposal Feb. 28, a month after Lundin agreed to a takeover by Inmet Mining Corp. (IMN) Equinox has offered a 14 percent premium, the lowest counter bid for a diversified-minerals company, according to data compiled by Bloomberg.
Freeport, the world’s largest publicly traded copper producer, is likely to make a rival proposal as it seeks to increase its stake in a copper mine in the Democratic Republic of Congo jointly owned with the government and Lundin, said WallachBeth Capital LLC’s Yemi Oshodi. Companies are competing to acquire mining assets amid a dearth of new projects after demand from China pushed copper prices to a record last month.
“The market is betting that if Lundin gets sold, it’s going to be at a higher price than the first price Equinox bid,” said Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth. “The speculation that Freeport is going to come in is a no-brainer.”
Eric Kinneberg, a Freeport spokesman, declined to comment.
Freeport’s shares advanced 42 cents, or 0.8 percent, to $52.40 in New York Stock Exchange trading today. Lundin climbed 6 cents, or 0.8 percent, to C$7.92 in Toronto.
Inmet of Toronto announced an agreement Jan. 12 to purchase Lundin for 0.0954 of a share for every Lundin share, the equivalent of a 2.2 percent premium above the 20-day trading average, to create a new company named Symterra Corp. Inmet, with operations in Turkey, Spain and Finland, has the right to match any other offer and is entitled to a breakup fee of C$120 million if the deal falls apart.
“Inmet recognized the risk that someone else comes in with a better deal,” said Raymond Goldie, an analyst at Salman Partners Inc. in Toronto who recommends buying Inmet shares. “If someone else does come in with a better deal, Inmet gets compensated for it.”
Inmet rose C$1.24, or 1.8 percent, to C$69.12 in Toronto.
Equinox countered the agreement this week by offering investors C$8.10 in cash, 26 percent above the previous day’s closing price, or 1.2903 shares and 1 cent for each Lundin share. The proposal is capped at a maximum cash portion of C$2.4 billion. Based on half stock and half cash, the takeover was worth an average of C$7.80 as of today.
Shares of Equinox have fallen 7.2 percent since the bid was announced. The West Perth, Australia-based company advanced 6 cents, or 1 percent, to C$5.82 today in Toronto.
The competing premium of 14 percent more than the 20-day trading average before Inmet’s original offer is the lowest ever for a diversified-minerals company, Bloomberg data show.
“It’s not a particularly huge premium, so it does leave the door open,” said Timothy Parker, who manages $8.5 billion in natural-resource stocks at T. Rowe Price Group Inc. in Baltimore, part of the firm’s $482 billion under management globally.
Equinox Chief Executive Officer Craig Williams said it’s possible there will be another competing bid for Lundin.
‘Can’t Discount It’
“It’s quite late in the day, but you can’t discount it,” Williams said yesterday in a telephone interview from Toronto. “On the basic metrics, it’s a pretty clear-cut decision for the Lundin shareholders in favor of our deal.”
Phil Wright, Lundin’s CEO, said in an e-mail that the company’s special committee is reviewing the offer from Equinox and will respond after it’s been “properly considered.” Jochen Tilk, Inmet’s CEO, didn’t respond to a message left at his office in Toronto.
In the last 12 months, companies that stepped in with rival bids had to pay a competing premium of at least 49 percent to prevail in deals greater than $1 billion, according to data compiled by Bloomberg.
Avis Budget Group Inc. (CAR) in Parsippany, New Jersey, paid a 49 percent premium to the 20-day average before the bidding war in its $1.33 billion takeover of Dollar Thrifty Automotive Group Inc. to fend off Park Ridge, New Jersey-based Hertz Global Holdings Inc. (HTZ) Hewlett-Packard Co. (HPQ), based in Palo Alto, California, pushed the competing premium for the $2.1 billion acquisition of storage-systems maker 3Par Inc. to 235 percent in August, beating out Dell Inc. (DELL) in Round Rock, Texas.
Lundin owns 24 percent of Tenke Fungurume, a copper mine in the south of the Congo that is scheduled to produce 290 million pounds of copper this year.
Freeport, with a 56 percent stake in the $2 billion project, said Jan. 20 that it’s evaluating expanding copper output there by as much as 200 million pounds within three years. Phoenix-based Freeport is “prepared to make acquisitions if opportunities come to us,” though it’s not part of the company’s strategy, CEO Richard Adkerson said at an analyst conference this week in Hollywood, Florida.
The company is boosting output at mines in North America and Africa to offset lower copper and gold sales at its Grasberg mine in Indonesia, the world’s largest combined copper and gold mine. Freeport slid 13 percent this year, while the Standard & Poor’s 500 Materials Index added 2.2 percent.
Orest Wowkodaw, an analyst at Canaccord Genuity Inc. in Toronto, said in a research note this week Freeport may join the takeover battle because of its joint interest in the Tenke mine.
Gecamines, Congo’s state-owned mining company, holds the remaining 20 percent of Tenke, which was completed in 2009. The project has an expected mine-life of more than 40 years, Lundin’s website said. That’s longer than Lundin’s projections for its other operations, including the Neves-Corvo copper and zinc mine in Portugal and mines in Sweden, Spain and Ireland.
The Equinox deal values Lundin at 9.6 times earnings before interest, taxes, depreciation and amortization, in line with the median for deals greater than $500 million in the diversified- minerals industry since 2006, data compiled by Bloomberg show. Inmet’s all-stock deal valued Lundin at 8.3 times Ebitda.
“I really think Inmet will just walk away,” said George Topping, a Toronto-based analyst at Stifel Nicolaus & Co. who rates Equinox “hold” and Lundin “buy.” “They cannot afford to offer cash, and without cash they’re not going to succeed. Investors just want the money.”
Return on Equity
Any of the suitors for Lundin may boost shareholder value. Lundin’s return on equity, a measure of how much a company earns for each dollar it invested, was 10 percent last quarter, trailing Freeport’s 46 percent return, Equinox’s 19 percent and Inmet’s 14 percent, data compiled by Bloomberg show.
The price of copper, used in electric cables and plumbing, climbed 32 percent in the past year through yesterday after demand rose in China, the largest user of the metal. Global consumption exceeded production by 34,774 tons in the first 11 months of last year, according to Bloomberg data.
Copper for delivery in three months on the London Metal Exchange traded at a record $10,190 a ton on Feb. 15. The metal will average $9,725 this year and $10,000 in 2012, according to the median of analysts’ estimates compiled by Bloomberg. Mining companies haven’t kept pace with demand because new reserves are becoming harder to find and the quality of ore is declining, meaning less copper is extracted from each ton of rock.
Equinox said it will finance the cash component of its offer through a $3.2 billion bridge loan arranged through Goldman Sachs Group Inc. (GS) of New York and Zurich-based Credit Suisse Group AG.
“We have a very healthy cash flow,” Equinox CEO Williams said in the interview. “And when you look at the cash flow of the combined entity, it’s a very healthy equation that gives us the ability to finance the acquisition.”
Lundin CEO Wright criticized the Equinox offer at an investor conference Feb. 28, saying Lundin-Inmet is a superior portfolio combination and that the Equinox bid should be all cash to make it easier for investors to evaluate. The Equinox deal would create a “very high level of debt,” he said, according to a transcript.
“Do you want to be in the hands of your lenders? Have we learned really nothing out of the last three years?” Wright said. “I have to tell you from my point of view, it’s been an uncomfortable experience back through 2008, and it’s not something that I would like to see our assets re-subjected to.”
Freeport has long-term debt of $4.66 billion, and cash and equivalents of $3.74 billion. The company is rated A1L by Bloomberg’s Company Credit Ratings, the seventh-highest level of investment grade. Even if the company paid for Lundin entirely with debt, its ranking would only fall one level, according to Bloomberg’s ratings, which analyze borrowers based on their indebtedness, profitability and other financial ratios.