Freeport-McMoRan buys two gas explorers for $20B - The Deal Pipeline (SAMPLE CONTENT: NEED AN ID?)
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Freeport-McMoRan buys two gas explorers for $20B

by Claire Poole  |  Published December 5, 2012 at 4:19 PM
Natural_Gas_Pipeline227x128.jpgFreeport-McMoRan Copper & Gold Inc. made a big expansion move into the oil and natural gas business, announcing Wednesday it had agreed to buy both Plains Exploration & Production Co. and McMoRan Exploration Co. for $20 billion.

The Phoenix copper, gold and molybdenum mining company will pay $6.9 billion for Houston-based Plains, including 0.6531 of a share of Freeport-McMoRan stock and $25 per share in cash, or $50 per share, a 39% premium over Plains' Tuesday closing price. Plains shareholders can choose cash or stock so long as they make up equal parts of the total price, or an expected $3.4 billion in cash and 91 million shares of stock.

Freeport-McMoRan will pay $3.4 billion in cash for New Orleans-based McMoRan, or $2.1 billion net of 36% of the interests Freeport-McMoRan and Plains already hold. When the deal closes, McMoRan shareholders will also receive a distribution of units in a royalty trust that will hold a 5% overriding royalty interest on future production in McMoRan's shallow water ultra-deep properties, or 1.15 units for each share owned. The cash portion works out to $14.75 per share, a 74% premium over McMoRan's Tuesday closing price, and excluding interests held by Freeport-McMoRan, the cash premium amounts to $900 million.

Tudor, Pickering, Holt & Co. Securities Inc. wrote in a note Wednesday that the deal was unexpected but not completely surprising, given the disconnect between the long-dated value in free cash flow-generating Gulf of Mexico assets and low-multiple market valuations.

Freeport-McMoRan said the combination is expected to be a premier U.S.-based natural resource company with an industry-leading global portfolio of mineral assets, significant oil and gas resources and growing production. The company said it expects that adding a high-quality, U.S.-focused oil and gas resource base will provide exposure to energy markets with positive fundamentals, strong margins and cash flows, exploration leverage and financially attractive long-term investment opportunities. "The combined company's long-lived resource base with commodities critical to the world's economies provides enhanced opportunities to benefit from long-term global economic growth," it said.

About 74% of the combined company's estimated Ebitda for next year is expected to come from mining and 26% from oil and gas, 48% from both in the U.S.

Freeport-McMoRan said the oil and gas assets being acquired are in onshore and offshore U.S. basins. Plains' major assets include its oil production facilities in California, expanding production in the onshore Eagle Ford in South Texas, production facilities and growth potential in the deepwater Gulf of Mexico and onshore resources in the Haynesville natural gas trend in Louisiana. McMoRan's assets focus on natural gas in the shallow waters of the Gulf of Mexico and onshore in South Louisiana.

"FCX [Freeport-McMoRan] has been built through our exploration and development capabilities, and this transaction will enable us to add assets with exceptional exploration and development potential to a world-class mining company to create a premier minerals and oil and gas business focused on value creation for shareholders," Freeport-McMoRan chairman James Moffett, who is also CEO of McMoRan, said in a statement.

Moffett said the deal will enable the company to build on a larger, well-capitalized platform. Freeport-McMoRan CEO and president Richard Adkerson said the deal won't diminish the company's focus on its mining operations and that attractive debt financing markets and its strong balance sheet will allow it to finance a significant portion of the transaction using low-cost debt.

Plains chairman and CEO James Flores said the deal creates an "opportunity" for its shareholders to participate in the transaction and that adding Plains' U.S. oil and gas assets to Freeport-McMoRan's mining business will establish a very significant, long-term commodities business positioned to generate meaningful returns over an extended period.

Moffett will continue as chairman and B.M. Rankin Jr. will continue as vice chairman. Adkerson will continue as president and CEO and will be appointed vice chairman. Flores will be vice chairman of Freeport-McMoRan and CEO of its oil and gas operations, and Kathleen Quirk will continue as Freeport-McMoRan's CFO. At closing, Freeport-McMoRan will add to its board Flores and two other unspecified members from Plains' board.

The company will be based in Phoenix, with offices in Houston and New Orleans to support its oil and gas operations and administrative functions. The transactions must clear shareholders of Plains and McMoRan and regulators and, in McMoRan's case, approval of an amendment to McMoRan's certificate of incorporation, but are expected to close in the second quarter of 2013.

Freeport-McMoRan said it's received $9.5 billion in financing commitments from JPMorgan Chase Bank NA to fund the cash portion of the deals and repay debt outstanding under Plains' term loans and revolver. With the transactions, the company's debt will be $20 billion, or $16.3 million net of cash, and it expects to use the company's cash flow to repay debt as well as invest in development projects. The company expects its Ebitda next year will be $12 billion and operating cash flows will be $9 billion, assuming prices of $3.50 per pound for copper, $1,500 per ounce for gold, $12 per pound for molybdenum, $100 per barrel for Brent crude and $4.50 per thousand cubic feet equivalent for natural gas and current estimates of production. It expects to continue its regular annual common dividend of $1.25 per share.

Freeport-McMoRan is the world's largest producer of molybdenum and has assets in the Grasberg minerals district in Indonesia, the world's largest cooper and gold mine in terms of recoverable reserves. It also has mining operations in the Americas, including the Morenci minerals district in North America and the Cerro Verde and El Abra operations in South America, and owns assets in the Tenke Fungurume minerals district in the Democratic Republic of Congo. Credit Suisse Securities (USA) LLC's Greg Weinberger advised the special committee of Freeport-McMoRan's board and Wachtell, Lipton, Rosen & Katz LLP's David Shapiro, Gordon Moodie, Jenna Levine, Zachary Podolsky, Elina Tetelbaum, Eitan Hoenig, Nelson O. Fitts, Jeannemarie O'Brien, Adam Kaminsky, Joshua Feltman, Austin Witt, Neil Chatani and Joshua Holmes provided legal counsel.

An Evercore Partners Inc. team including Roger Altman, Will Hiltz, Tim Carlson, Matthew Brogdon, Brad Parker, Doug Rogers, Jerry Smith, Steven Becker, John Day, Reilly Bliton, Rachel Bennett and Matt Veazey assisted the special committee of McMoRan's board.

Weil, Gotshal & Manges LLP's Michael Aiello, Sachin Kohli, Frank Martire, Alex Clavero, A.J. Frey, Matthew Falcone, Rodney Moore, Sacha Jamal, Matt Bloch, Andrew Woodworth, Richard Ginsburg, Jared Rusman, Randell Gartin, Charan Sandhu, John Neuwirth, Greg Danilow, Annemargaret Connolly, Thomas Goslin, Amy Rubin, Eric Schecter, Zahava Blumenthal, Steven Newborn, Vadim Brusser, Samuel Zylberberg and Elliot Ganchrow represented McMoRan's committee.

Plains received financial advice from a Barclays plc team consisting of Greg Pipkin, Brad Hutchinson, Gavin McOuat, Hank Hilliard and Chris Watson.

Latham & Watkins LLP's Michael Dillard, Sean Wheeler, Mark Gerstein, Debbie Yee, Chris Little, Enoch Varner, Trent Roberts, Sam Rettew, Adrian Milton, Matt Waldron, Laurence Stein, John Clair, James D.C. Barrall, Laurence Seymour, E. Marcellus Williamson, Sydney Smith, Patrick Shannon, Blair Connelly, Joel Mack, Claudia O'Brien and Christopher Langdon counseled Plains.

Mark Gentile and Don Bussard at Richards, Layton & Finger PC served as Delaware counsel for Plains.

Tags: Barclays plc | Credit Suisse Securities (USA) LLC | Evercore Partners Inc. | Freeport-McMoRan Copper & Gold Inc. | JPMorgan Chase Bank | Latham & Watkins LLP | McMoRan Exploration Co. | Plains Exploration & Production Co. | Tudor Pickering Holt & Co. Securities Inc. | Wachtell Lipton Rosen & Katz LLP | Weil Gotshal & Manges LLP

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Claire Poole

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