December 5, 2012 / 1:57 PM / in 5 years

Freeport makes $9 billion energy bet; Wall Street pans deal

(Reuters) - Freeport-McMoRan Copper & Gold Inc on Wednesday said it struck a deal to buy Plains Exploration & Production Co and McMoRan Exploration Co for a total of $9 billion in a bold bid to diversify into the U.S. energy sector.

But Freeport’s shares tumbled 14 percent and the cost of protecting its debt against default soared as investors and analysts slammed the move as unnecessary. 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, which is one of the world’s largest copper miners and is concentrated outside the United States. Plains and McMoRan are 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 is paying a premium of 39 percent for Plains and 74 percent for McMoRan, based on their closing stock prices on Tuesday, for the chance to explore new opportunities, given the difficulty in finding and developing attractive copper assets.

“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 in the most pointed comments on a contentious conference call.

Units 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.

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 chief executive of McMoRan Exploration. In addition, Plains owns nearly one-third of McMoRan Exploration’s shares after a 2010 asset sale deal.

“NO COMPELLING RATIONALE”

Freeport shares dropped 14.4 percent to $32.78 in afternoon trading, erasing gains made over the last five months. Its bonds sank and the cost of protecting its debt against a default rose 11 percent.

“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 of both Plains and McMoRan Exploration rallied, though some analysts said the deal undervalued Plains, which has prospects in California and the Haynesville Shale in Texas.

“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 24.9 percent to $45.02 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 of McMoRan that Freeport and Plains already own.

McMoRan shareholders would also get 1.15 units of a royalty trust for each share held. That trust would hold a 5 percent royalty interest in future production from McMoRan properties in ultra-deepwater territories.

Shares in McMoRan soared 82 percent to $15.40.

One source close to the deal, speaking on condition of anonymity, said that ”Neither deal was cross-conditional on the other.

“If you’re ultimately going to do the transaction anyway, it makes sense to do that together.”

“FORMIDABLE ENTITY”

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 would also give 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.

“I do think it could partly reflect that the miners are starting to look elsewhere,” said Alex Terentiew, an analyst with Raymond James Ltd in Toronto. “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.”

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, David Gregorio and Leslie Adler

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