Freeport-McMoRan Copper & Gold Inc said Wednesday it would buy Plains Exploration & Production Co and McMoRan Exploration Co for a total of $9 billion in cash and stock in a major expansion into the energy sector.
The deal will also leave Freeport with $20 billion in debt, which scared some investors and sent Freeport shares sliding 13 percent in morning trade. The cost of protecting its debt against default also rose sharply.
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"Plains had been deeply undervalued, but on the other hand, Freeport shareholders could have just as easily gone ahead and bought those deeply undervalued shares without paying a hefty premium and without the pleasure of paying a cohort of investment bankers hefty fees," Morningstar analyst Dan Rohr said in an interview.
The deal lets Freeport diversify, 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. Almost three-quarters of its 2013 operating earnings would come from mining and the rest from oil and gas.
It also unites 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."
Only a handful of major miners have diversified beyond core metals and bulk commodities into oil and gas - among them 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.
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 26.2 percent to $45.53 in morning trading. At least one analyst said Freeport was underpaying.
"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.
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 81 percent to $15.32. Freeport was off 13.2 percent to $33.19.
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 Josephine Mason, Michael Erman and Soyoung Kim in New Yotk; Writing by Ben Berkowitz; Editing by Jeffrey Benkoe and Bernadette Baum)