Freeport-McMoRan Copper & Gold Inc.
) has made a major stride to venture into the U.S. energy space.
The company has forged definitive merger pacts, under which, it
Plains Exploration & Production Company
McMoRan Exploration Co.
) for roughly $9 billion.
The Phoenix-based company said that it will pay $6.9 billion in
cash to acquire Texas-based independent oil and gas company,
Plains. Moreover, it will takeover Louisiana-based exploration
and production company McMoRan for roughly $2.1 billion
(excluding 36% interest currently owned by Freeport and Plains)
in cash. The total transaction value is roughly $20 billion
taking into account the debt to be assumed by Freeport as part of
Plains own oil and gas assets in California, Texas, Louisiana and
the Gulf of Mexico. McMoRan, an ultra deep-water driller, spun
off from Freeport in the 1990's. The company shares management
with Freeport. Plains own a 31.5% stake in McMoRan and holds a
couple of seats in the latter's Board. McMoRan's shares took a
sharp tumble recently as its drilling update showed a delay in
the development of a major well ("Davy Jones") in the Gulf of
The transactions are expected to consummate in second-quarter
2013. Following the closure, the combined entity will be based in
Phoenix, Arizona, and will have offices in Houston, Texas, and
New Orleans, Louisiana.
James Moffett, the incumbent chairman of Freeport and co-chairman
and CEO of McMoRan, will remain as chairman in the combined
entity. Richard Adkerson, president and CEO of Freeport and
co-chairman of McMoRan, will retain his position following the
merger. Plains' chairman and CEO James Flores will become the
vice chairman of Freeport and the CEO of its oil and gas
Freeport is funding the cash portion of the twin deal with a $9.5
billion financing from JPMorgan Chase Bank, N.A., a unit of
JPMorgan Chase & Co.
). It will also use the fund to repay Plains' outstanding debt.
Credit Suisse Securities (USA) LLC acted as financial advisor to
Freeport on both the deals.
The move represents a part of the company's strategy to diversify
away from its bread-and-butter copper mining business. Freeport,
which is struggling with declining copper and gold sales, is
seeking new avenues for growth. Lower production rates at its
Grasberg mine in Indonesia dragged down copper sales and hurt its
bottom line in the most recent quarter.
Freeport's copper business has been hammered by the sluggish
global economy. Demand from key end markets, including
construction materials and electronics, remain weak due to the
overall economic softness. As such, the buyouts are expected to
usher in new opportunities for the company.
Investors, however, viewed the move to enter the energy markets
as risky and questioned the reunion with troubled McMoRan, and
Freeport's shares slipped 16% following the deal announcement.
Shares of Plains and McMoRan rallied 23% and 87%, respectively.
Per the agreement, Freeport is buying Plains for $50 per share in
cash and stock. The offer represents a 39% premium to Plains'
closing price on December 4. Plains shareholders will be given an
option to receive cash or stock.
For the McMoRan buyout, the company is paying $14.75 per share in
cash, representing a 74% premium to McMoRan's closing price on
December 4. McMoRan shareholders will also get 1.15 units of a
royalty trust for each share they hold. While the total deal
value is $3.4 billion, the actual cash portion of the transaction
is $2.1 billion (net of Freeport and Plains stakes). Both
transactions are subject to regulatory clearances and approval of
the shareholders of the respective companies.
An Emerging Natural Resources Powerhouse?
The merger is expected to make the combined entity a leading
natural resource conglomerate in the U.S., leveraging Freeport's
industry-leading mineral assets and the oil and gas resources of
Plains and McMoRan. The addition of Plains' established oil
production assets and McMoRan natural gas drilling capabilities
and shallow water ultra-deep properties will provide Freeport a
significant exposure to energy markets.
Freeport expects the combined entity to generate operating cash
flows of roughly $9 billion and EBITDA of around $12 billion in
2013. Roughly 74% of the combined company's projected EBITDA is
expected to derive from mining with the balance coming from oil
and gas. The company sees significant synergies from the
Neutral on Freeport
We are optimistic about Freeport's African operations considering
the potential at the Tenke Fungurume minerals district in
Democratic Republic of Congo. However, a weak global economy is
affecting demand for copper and higher production costs remain a
We are also wary about the dilution associated with the newly
announced deals and increased leverage following the merger.
Freeport, which had total debt of roughly $3.5 billion at the end
of the third quarter, expects its debt to jump to around $20
billion ($16 billion net of cash) following the merger.
Freeport, which competes with
Newmont Mining Corp.
Southern Copper Corp.
), retains a short-term Zacks #3 Rank (Hold). We have a long-term
Neutral recommendation on the stock.
FREEPT MC COP-B (FCX): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
MCMORAN EXPLOR (MMR): Free Stock Analysis
NEWMONT MINING (NEM): Free Stock Analysis
PLAINS EXPL&PRD (PXP): Free Stock Analysis
SOUTHERN COPPER (SCCO): Free Stock Analysis
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