BASE METALS ARE HOT$$$$$BIG battle of giant.
Teck Cominco Bids for Inco to Create "Canada's Champion"
By Gary Norris
08 May 2006 at 11:19 AM EDT
TORONTO (CP) -- Teck Cominco Ltd. [TSX:TEK.SV.B] is moving to bulk up into a Canadian mining behemoth big enough to thrive in the global big leagues with a takeover bid for Inco Ltd. valued at C$17.8 billion.
Monday's stock-and-cash proposal is conditional on Inco [TSX:N; NYSE:N] scrapping its planned acquisition of Falconbridge Ltd. [TSX:FAL.LV; NYSE:FAL].
Up to C$6.4 billion of the Teck Cominco bid is in cash, with the rest in Teck shares.
Inco stock gained almost 15% on the news, while Teck declined 5% and Falconbridge rose almost 7%.
''The combined company that will result from completion of our bid will be a true world leader, operating worldwide but with its roots firmly in Canada, from Newfoundland through Ontario to the West Coast,'' Teck chairman Norman Keevil told a news conference.
''It'll be a powerhouse that will be Canada's champion on the world stage.''
The combined company would be the world's largest zinc miner, second-largest nickel miner, second-largest exporter of hard coking coal and largest producer of indium, a metal used in flat-screen televisions. It also would have significant production of copper, gold, silver, platinum and other metals, along with Teck Cominco's interest in the Alberta oilsands.
Inco issued a brief news release saying its board will respond to a formal offer from Teck Cominco ''in due course.'' It added that Inco ''remains committed to its friendly, value-creating transaction with Falconbridge.''
Falconbridge expressed surprise ''that Teck Cominco has taken this step to interfere in our transaction,'' and said it and Inco ''are determined to complete it.''
Inco's friendly stock-and-shares offer for Falconbridge was valued at C$12.5 billion when it was presented last October and has since moved up to about C$15 billion as Inco's share price has risen.
Monday's bid by Vancouver-based Teck for Toronto-headquartered Inco is valued at C$78.50 a share and gives Inco stockholders ''a better deal than the one they have been faced with for the last number of months,'' said Teck CEO Donald Lindsay.
He said that shortly before Inco made its offer for Falconbridge, Teck Cominco approached Inco about a merger, ''but it did not go very far.''
Teck is offering C$78.50 in cash or 0.9776 Teck share plus five cents in cash for each Inco share.
Inco stock shot up as much as 20% to C$78.50 in early trading on the Toronto Stock Exchange, but by the close was up C$9.41 at C$74.83.
Teck Cominco was down C$3.78 to C$76.47 while Falconbridge advanced C$3.15 to C$50.38.
''It's a terrific opportunity for the Teck shareholders and a pretty impressive opportunity for Inco shareholders - it is one of these mergers that everybody will certainly benefit,'' said Ron Coll, an analyst at Jennings Capital.
''Bigger is better in this business,'' Coll added, noting that global investors pay a premium for shares in large diversified companies with massive reserves.
Teck's Lindsay said Inco and Falconbridge ''are good companies and the deal they propose is logical, but we believe that our deal is better for Inco shareholders.''
The cash component is capped at C$28 per share or C$6.36 billion. Lindsay said Teck Cominco has C$3.2 billion in cash and has arranged financing.
Lindsay observed that the Inco-Falconbridge combination is entangled in antitrust concerns, while the stock market ''is telling us that Inco's offer is unlikely to be completed on its present terms,'' with Falconbridge's recent stock price well above the Inco bid.
Jennings Capital's Coll said the market has been expecting Inco to sweeten its bid, or else be topped by Switzerland-based Xstrata [LSE:XTA], which paid C$2 billion for 19.9% of Falconbridge last year.
The combined Teck Cominco-Inco, with a stock-market value of over C$30 billion, ''will certainly be big from a Canadian perspective, it'll be big from a North American perspective; it wouldn't be the biggest company out there from a global perspective,'' Coll said. Australian-headquartered BHP Billiton Ltd. has a market capitalization of about US$90 billion.
The combined Teck Cominco and Inco would be headquartered in Vancouver, with Inco's Toronto presence reduced to a sales office.
However, Inco is ''pretty tied at the hip to Falconbridge,'' commented Kerry Smith of Haywood Securities, but he noted that the elevated Falconbridge share price leaves Xstrata's next move as a key factor.
''Xstrata will sit and see how this plays out,'' Smith predicted, adding that ''I personally believe the Inco-Falconbridge deal is the better deal.''
Teck's Lindsay said the combination with Inco would quickly generate cost-saving synergies of at least C$150 million a year.
Additionally, ''we believe that we could achieve a significant portion of Inco's estimate of potential savings in Sudbury (in northern Ontario) by extending our long history of successfully partnering with Falconbridge.'' He said this could be worth C$75 million annually.
Lindsay added that ''we have very little product overlap with Inco, and we therefore do not expect that our transaction will face the same regulatory challenges that have delayed the Inco-Falconbridge transaction.''
Monday's statement from Falconbridge said the combination with Inco, creating the world's biggest nickel producer, still ''offers compelling value,'' and the companies have been in discussions with the European Commission and the U.S. Department of Justice over competitive concerns.
Taking over Inco would add to Teck Cominco's earnings under a wide range of future metal prices, Lindsay said. He expressed confidence that the global metals market will remain strong, although ''we do recognize that it will be volatile, it will be cyclical and there will be corrections.''
He said the industry as a whole ''will have great difficulty and will be much slower in responding with new supply in the face of labour shortages, longer equipment delivery times, production interruptions, permitting delays and political risk in resource-rich countries.''
Moody's Investors Service commented that in the current strong metal price environment it expects ''fairly rapid'' repayment of debt Teck takes on the for deal.
The debt rating agency added that the combined company ''will have a broad commodity and geographic profile, which should moderate exposure to cyclical swings in any particular commodity.''
© The Canadian Press 2006