Freeport’s Takeover of Plains Opposed by Arrowgrass Capital

Freeport-McMoRan Copper & Gold Inc.’s takeover of Plains Exploration & Production Co. faces more opposition after shareholder Arrowgrass Capital Partners LP said it will reject the deal.

The price Freeport agreed to pay for the oil and natural gas producer is too low, the London-based hedge fund started by former Deutsche Bank AG traders said in a letter obtained by Bloomberg News. Investors are scheduled to vote on Phoenix-based Freeport’s $9 billion takeover of Plains and McMoRan Exploration Co. on May 20.

“We are confident that Plains shares would trade at or better than current levels in the absence of the Freeport proposal,” Michael Edwards, a partner at Arrowgrass, said in the letter to Plains’ board dated today. The company’s performance in the Eagle Ford Shale formation in Texas and the Gulf of Mexico show the Freeport purchase “offers no or arguably negative premium.”

Arrowgrass, which said it owns about 4.6 million Plains shares, is the latest investor to voice opposition to the deal. CR Intrinsic Investors LLC, which said it owns 3.8 percent of the common stock including shares underlying call options, also rejects the deal, according to a May 6 letter to the Plains board. Freeport agreed in December to acquire Plains for a mix of cash and stock that valued the company at $50 a share.

Above Offer

Freeport rose 0.4 percent to $31.55 at the close in New York, valuing its bid for Plains at $45.61 a share, while Plains gained 1.6 percent to $46.79. Plains has traded at a premium to the bid every day since March 15, according to data compiled by Bloomberg.

Eric Kinneberg, a Freeport spokesman, declined to comment yesterday on Arrowgrass’s position or whether Freeport expects the deal to be approved by Plains shareholders. Hance Myers, a spokesman for Houston-based Plains, declined to comment.

Institutional Shareholder Services Inc., a proxy adviser, has recommended investors vote against the acquisition. Plains may “conservatively” be valued at $45.64 to $52.32 a share on a stand-alone basis, ISS said in a May 6 report.

The ISS analysis failed to account for several important factors about the deal and Freeport is still committed to completing the transaction on the terms negotiated with the Plains board, Kinneberg said in an e-mail today.

“There have been no material developments following the agreed terms that would indicate increased values for the Plains assets,” he said.

‘Rallying Cry’

The mounting investor push-back threatens the deal, said Mark Hanson, an analyst at Morningstar Inc. in Chicago. CR’s rejection of the deal is symbolically powerful because the company isn’t a traditional activist investor, he said. Plains executives also own less than 5 percent of the stock.

“I could see this certainly being a rallying cry” for other investors, he said. “You’ve got two weeks, which is forever in an investment horizon.”

If shareholders reject the deal, a private-equity firm may step in, he said.

“It is a mature, cash-flowing asset,” he said. “Private equity has certainly taken out bigger firms than this.”

Freeport announced the two takeovers Dec. 5 in a bid to expand its businesses. The mining company announced it would pay investors $14.75 a share in cash plus a stake in a royalty trust for New Orleans-based McMoRan Exploration, a company that was spun off from Freeport-McMoRan Inc. almost two decades ago.

Class Action

With the two additions, the company that got almost 80 percent of its $18 billion of revenue last year from copper would become a global natural-resources provider with access to oil and gas deposits onshore and in the U.S. Gulf of Mexico.

Investors sued both McMoRan and Plains in a series of lawsuits in Delaware Chancery Court in Wilmington alleging the directors violated their duties to get the best price for the companies.

McMoRan said today it agreed to settle the class action lawsuit. As part of the settlement, McMoRan agreed to certain actions related to the listing of the royalty trust units and to make additional disclosures about the merger, among other things, the company said in a filing. It didn’t admit any liability or wrongdoing.

Paulson & Co., the hedge-fund manager run by billionaire John Paulson, is Plains’s biggest holder, with about a 10 percent stake, data compiled by Bloomberg show. A spokesman for Paulson declined to comment.