Freeport-McMoRan Copper & Gold Inc struck a deal to buy Plains Exploration & Production Co and McMoRan Exploration Co for $9 billion in a bold bid to diversify into the U.S. energy sector.
But the shares tumbled 13 percent and the cost of protecting its debt against default soared. Investors and analysts slammed the move as unnecessary and a managing director at one of the company's top-five shareholders said management had done nothing to justify the combination.
On paper the deal reshapes Freeport, with its mining profile largely outside the United States, and Plains and McMoRan concentrated in energy plays in California, Texas and the Gulf of Mexico. About a quarter of the combined company's 2013 operating earnings would come from oil and gas.
Freeport, one of the world's largest miners, paid a premium of 39 percent for Plains and 74 percent for McMoRan to explore new opportunities given the difficulty in finding and developing attractive copper assets. Investors, however, were unconvinced.
"I haven't heard anything on this call that in any way justifies why these companies should be put together," Evy Hambro, a managing director at BlackRock, said on a contentious conference call to discuss the deal. Arms of BlackRock control 6.4 percent of Freeport, according to Thomson Reuters data.
Hambro, like analysts earlier in the day, said Freeport investors wanted copper exposure, and that if they wanted to invest in oil and gas they could have done so directly.
Freeport shares dropped 13.4 percent to $33.14 in afternoon trading, erasing gains made over the last five months.
"The company's presentation on the transaction released this morning contains no compelling rationale to explain the shift in focus," BMO analyst Tony Robson wrote in a client note.
Shares in Plains and McMoRan Exploration both rallied, though some analysts said the deal undervalued Plains, which has prospects in California and the Haynesville Shale.
"Any way you slice it, based on enterprise value, reserves, it comes up to at least $60-$70 per share. I would be surprised if a current Plains shareholder doesn't agitate for higher value," Morningstar analyst Mark Hanson said.
Freeport said it would pay $25 cash and 0.6531 shares of its common stock for each Plains share, adding up to $50 per share, or a total deal value of $6.9 billion.
Plains shares rose 25.6 percent to $45.27 in afternoon trading.
In the other deal, Freeport will pay $14.75 cash for each McMoRan share, or $2.1 billion, after taking into account shares in McMoRan that Freeport and Plains already own.
McMoRan shareholders would also get 1.15 units of a royalty trust for each share they hold. That trust would hold a 5 percent royalty interest in future production from McMoRan properties in ultra-deepwater territories.
Shares in McMoRan Exploration soared 83 percent to $15.43.
Only a handful of major miners have diversified beyond core metals and bulk commodities into oil and gas. Among these are BHP Billiton, the world's largest diversified miner, which sees its exposure to oil and shale gas, in particular, as a key differentiating factor.
"Simply folding in McMoRan I don't think achieved the level of scale that would be material for a company the size of Freeport-McMoRan," Global Hunter Securities analyst Curtis Trimble said.
"But certainly, when you include the assets as well as the production upside Plains achieved from the recent Gulf of Mexico acquisition, you have a formidable entity with a worldwide presence," he said, referring to a recent deal Plains did with BP Plc.
The latest deal also gives Freeport new growth opportunities. Analysts have said copper mining companies have found it increasingly difficult to find new projects in politically stable countries, and there are fewer deal targets after almost a decade of mega-mergers.
"Copper demand growth is coming under pressure. You're seeing competitors adjust their portfolio towards later-stage commodities. If the intention was they see something similar, I can see some rationale in that," said Bank of America-Merrill Lynch metals market analyst Michael Widmer.
If successful, the deal would unite companies with a shared history. Both Freeport-McMoRan Copper & Gold and the company now known as McMoRan Exploration Co were spun off in the 1980s and 1990s from the former Freeport-McMoRan Inc.
James Moffett is chairman of Freeport-McMoRan and also co-chairman and CEO of McMoRan Exploration. In addition, Plains owns nearly one-third of McMoRan Exploration's shares after a 2010 asset sale deal.
"Neither deal was cross-conditional on the other," according to one source close to the deal, speaking on condition of anonymity. "If you're ultimately going to do the transaction anyway, it makes sense to do that together."
Moffett will continue as chairman of the combined entity after the deal closes and Freeport's Richard Adkerson will be president, chief executive and vice chairman.
James Flores, currently CEO of Plains, will be vice chairman of Freeport and CEO of the oil and gas operations. The corporate headquarters will be in Phoenix.
J.P. Morgan Chase has agreed to provide $9.5 billion in financing, Freeport said, to cover the cash considerations and to repay Plains' term loans and revolving credit line.
Credit Suisse was financial adviser to the special committee of Freeport's board, and Wachtell, Lipton, Rosen & Katz was legal adviser.
Evercore Partners was the financial adviser to the special committee of McMoRan's board, and Weil, Gotshal & Manges was legal adviser.
For Plains, Barclays served as financial adviser, and Latham & Watkins was the legal adviser.
(Reporting by Swetha Gopinath in Bangalore, Julie Gordon in Toronto, Clara Ferreira-Marques in London and Ernest Scheyder, Josephine Mason, Michael Erman and Soyoung Kim in New Yotk; Writing by Ben Berkowitz; Editing by Jeffrey Benkoe, Bernadette Baum and David Gregorio)