Freeport’s bold move to acquire Plains Exploration & Production Company (NYSE:PXP) and McMoRan Exploration Co.(NYSE:MMR) for $ 9 billion is being criticized hugely by market analysts and industry experts. The deal was aimed to diversify into US energy market as global copper market declines. The share prices of the company have dipped sharply while the leverage ratio declined by 11% after the merger deal.
The world’s largest copper mining company has planned to take stakes in oil and gas sector players to explore the growth prospects in the US base. Richard Adkerson from Freeport-McMoRan Copper & Gold Inc.(NYSE:FCX) will hold office as President, Vice-chairman and chief executive for the newly formed company headquartered in Phoenix. Jim Flores CEO Plains Exploration & Production will remain vice chairman and CEO of Freeport would take charge of oil and gas sector operations.
The acquisition deal is merely revival of the vows between Freeport-McMoRan Copper & Gold Inc.(NYSE:FCX) and what is now termed as McMoRan Exploration Co.(NYSE:MMR). Both these companies evolved after spin off from (then called) Freeport-McMoRan Inc., during 1980s and 1990s. Not to mention that Plains Exploration & Production Company already owns almost 75% of McMoRan Exploration’s shares after the 2010 asset transaction between the two.
Internal sources confirmed the two bids are mutually exclusive and independent. Out of total deal amount MMR will get $2.1 billion in the form of $14 per share and 1.5 units in the form of a royalty for its shares through trust. The remainder of $6.9 billion will be paid to PXP as $25 in cash and balance of 0.6531 through Freeport shares.
Bob Moffett chairman of Freeport-McMoRan and co-chairman along with chief executive of McMoRan Exploration Co.(NYSE:MMR) will be paid up to $73 million in cash for his shares while his counterpart at Plains Exploration & Production, Mr. Flores could encash $64.5 for his shares and another $150 million as a change agent in implementation phase of the merger.
Despite the fact that the acquirer company has offered a $39% premium on the market price at day close analysts believe shares of Plains Exploration & Production Co (PXP) to be hugely undervalued. According to analyst Curtis Trimble from Global Hunter Securities Plains deal with BP Plc (BP.L) turned the business value up “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.
Although very few copper miner have invested beyond the closely related commodities and metals market the trend towards diversification into related sectors has been rising slowly as business growth opportunities diminish in politically stable countries. Commenting on the nature of underlying assets in a mining business Alex Terentiew, analyst Toronto based Raymond James Ltd. Said ” These are depleting assets, and if you do not keep investing in new assets, come 10-20 years down the road you’re going to have nothing left,”.
Consequent to the proposed merger’s announcement shares of both potential acquisition targets saw an immediate surge. The steep upward slanting slope in the share prices indicated that the consideration bid is worth $4 lower per share since its announcement.
Plains Exploration & Production Company (NYSE:PXP) rose 23.44% to close at $44.50 a share while shares in McMoRan Exploration Co.(NYSE:MMR) rose 87% to $15.82. Freeport-McMoRan Copper & Gold Inc.(NYSE:FCX) shares were down by 15.99% to close at $32.16.
