For anyone interested in M&A tactics, the wave of dealmaking transforming the global mining industry makes for compelling theater. In the last year, major companies on five continents have generated a flurry of bids and counterbids for each other, jockeying for position while trying to stay on the right side of demanding regulators and assertive shareholders.
The maneuvers have been duly reported, along with the underlying reasons for the consolidation: strong demand for the miners' products from the developing world, especially China, coupled with the fact that it's much faster and easier to acquire new mines than to develop them. The deals themselves, meanwhile, are among the largest in a record year for M&A. The latest case in point is Freeport McMoRan Copper & Gold Inc.'s agreement to acquire Phelps Dodge Corp. for $26 billion, announced in December.
But now things really get interesting. Given the role reversals the companies have undergone as they move from partner to prospective partner (Phelps was previously a would-be acquirer, not a target, one of several companies that made the switch), you might almost think that mining companies are themselves commodities. They aren't, though. Besides the obvious geographic and cultural differences, these are companies with varied products, technologies and customer relationships. So the difference between the strategic premise for a deal that almost happened, and the one that actually closed, may be significant -- and may cast an especially bright light on the crucial task of post-merger integration.
Nobody knows that better than Scott Hand, former CEO of Canadian nickel miner Inco Ltd. As recently as July 2006, Hand was arguing that Toronto-based Inco should acquire crosstown rival Falconbridge Ltd., which like Inco is a major nickel producer with deep roots in the mining city of Sudbury in northern Ontario. Announced in October 2005, the $10.2 billion deal anticipated synergies of $550 million a year, corporate staff reductions totaling as many as 150, and the creation of the world's biggest nickel company, with a major position in copper as well. Hand would have been CEO had the deal gone through.
As it turned out, though, Inco ended up not as an acquirer but as a target, for Brazil's Cia. Vale do Rio Doce. CVRD took control of Inco in late October in a deal with a total value of C$19.35 billion ($16.45 billion). The world's largest iron ore company, CVRD is a former state enterprise with varied holdings (for example, in logistics) that was privatized in 1997. Though CVRD has nickel projects in development in Brazil, it wants to get bigger in that metal in a hurry, enticed in part by booming demand for stainless steel, which nickel is needed to make. As CVRD chief executive Roger Agnelli explains, he wants Inco not just for its deposits but for its nickel technology and know-how.
This need, combined with some pressure from Canadian regulators, has resulted in a Canada-friendly approach to integration -- led by none other than Scott Hand, who fought against the deal for months. The former Inco CEO is now CEO of CVRD Inco Ltd., a new nickel unit based in Toronto, into which CVRD's nickel assets have been folded. He's joined on an integration steering committee by Jose Lancaster, CVRD's executive director for nonferrous metals, and Murilo Ferreira, CVRD's executive director for equity holdings and business development.
Hand will retire in a year. But meanwhile, having fallen short on a deal that would have pleased many Canadians by keeping ownership of a 104-year-old mining icon in Canadian hands, he's working on an integration project partly meant to preserve its identity. "The new company is called CVRD Inco Ltd., so the Inco name continues as a great name, and I think that was one of the smart things that CVRD decided in acquiring Inco," Hand said after a special shareholder meeting on Jan. 3, called to enable CVRD to take up the 13% of Inco it didn't already own. CVRD's Agnelli, meanwhile, had previously said that there are no plans to sell any Inco assets, change its investment plans or alter its daily business.
Hand told the Inco shareholders that the integration is going well. "I think everything will be completed probably by the end of this month or early in February," he said. Once the integration is complete, Agnelli and Hand will discuss Hand's next role.
The CVRD-Inco combination is the latest chapter in a story that began even before Inco and Falconbridge announced their plan to form a mammoth Canadian mining company in October 2005. That announcement followed weeks of speculation that Falconbridge would be the target of a takeover bid by Anglo-Swiss miner Xstrata plc, which had already acquired 19.9% of Falconbridge from Brascan Corp. Under the deal with Brascan, however, Xstrata couldn't bid for the rest of Falconbridge for several months without offering Brascan the same price for its stake.
That gave Inco time to get an offer on the table for Falconbridge. But Inco was forced in February to extend its bid deadline a third time, to June 30, to await approval by U.S. and European regulators. The U.S. Department of Justice review of the deal was expected to take up to two months. That delay gave rival suitors time to prepare bids for both Inco and Falconbridge, and plans for a much-touted all-Canadian nickel producer began to unravel.
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Overview |
CVRD is the World's largest producer of iron ore and the second largest producer of manganese and iron alloys. |
Inco is the world's second-largest producer of nickel, with a 19% market share.
Inco also produces copper, precious metals, cobalt, sulphuric acid and liquid sulphur dioxide. |
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| 2005 revenue |
$13.4 billion |
$4.5 billion |
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| Before the deal |
CVRD was pursuing a strategic expansion into nickel, used in stainless steel, a growing market. |
Inco attempted an acquisition of Falconbridge Ltd., a rival Canadian nickel producer, and then a three-way merger with Falconbridge and Arizona's Phelps Dodge. |
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| After the deal |
CVRD established CVRD Inco, a new nickel unit headquartered in Toronto, into which CVRD's nickel assets have been folded, led by former Inco CEO Scott Hand. CVRD is also considering a North American stock exchange listing for the unit. |
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Source: CVRD, Inco, The Deal |
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Vancouver, British Columbia-based miner Teck Cominco Ltd. (a world leader in zinc and metallurgical coal), which would later reveal that it had wanted in on the Inco-Falconbridge deal from the start, launched a hostile bid of C$17.8 billion for Inco on May 8. Five days later, on May 13, in anticipation of a hostile bid for Falconbridge by Xstrata, Inco sweetened its offer by about C$5 a share in cash and stock for a total of about C$19 billion.
As expected, Xstrata on May 17 launched its C$16 billion offer for the 80% of Falconbridge it didn't already own. That all-cash bid, which analysts said was superior to Inco's cash-and-shares offer, was contingent on Falconbridge rejecting the Inco offer.
But just over a month later, on June 26, Inco, Falconbridge and Arizona-based Phelps Dodge announced one of the biggest deals ever in the metals industry, a $48 billion, three-way merger that would thwart the hostile bidders (though still leave the two Canadian companies under foreign ownership). Phelps Dodge agreed to offer C$80.30 a share for the combined Inco-Falconbridge once the Canadian deal was completed. Meantime, Inco would boost its bid for Falconbridge, but the offer would remain a cash-and-stock proposal.
Both Xstrata and Phelps sweetened their bids in July, but by then some Phelps shareholders had publicly denounced the Inco-Falconbridge takeover as too expensive, and Xstrata's all-cash bid was gaining support.
Phelps Dodge, under pressure from shareholders, opted to forgo a further sweetener, and Inco was forced on July 28 to let its bid for Falconbridge expire. Inco ceded Falconbridge to Xstrata but forged ahead with the plan to be acquired by Phelps Dodge.
Three days later, Teck Cominco boosted its offer for Inco to about C$18.8 billion. The sweetener was followed within a fortnight by CVRD's hostile bid for Inco. Teck bowed out on Aug. 16 after failing to raise money for a sweetener, and on Sept. 5 Phelps walked away, leaving Inco to CVRD. After three weeks of talks, Inco announced on Sept. 24 that its board was urging shareholders to accept CVRD's C$86 a share offer.
Hand, a New Yorker and a lawyer who became Inco's CEO in April 2002 after holding various positions since 1993, has faced more than a little criticism for his handling of the failed Inco-Falconbridge deal. But in Sudbury, home to the bulk of Inco's Canadian mining operations, Mayor John Rodriguez has embraced the new CVRD Inco. On Dec. 14, Rodriguez hailed a C$52 million investment in new copper separation technology at the Clarabell Mill as "a new relationship between CVRD Inco and the community."
Some of the credit for that relationship goes to the federal government's Industry Canada department. The regulator vets all potential takeovers by foreign buyers to determine if they're in the country's best interests. Knowing the Inco-Falconbridge deal had been held up and ultimately unwound because of European regulatory delays that gave competing bidders time to get their offers on the table, CVRD made big promises to satisfy Industry Minister Maxime Bernier.
But along with helping CVRD to get the deal done, some of the promises may also reflect the Brazilian company's need to preserve the value of what it's buying. Along with establishing CVRD Inco in Toronto and agreeing to manage all global nickel activities from there, the deal gives the Canadian headquarters responsibility for interests in all existing and future nickel projects and bases the company's chief operating officer and most of its senior managers there. CVRD also promised no layoffs at Canadian operations for at least three years and vowed to keep employment at no less than 85% of current levels thereafter. Inco employs more than 6,800 workers in the sprawling Sudbury Basin, at its operations in Thompson, Manitoba, and its Voisey's Bay project in Newfoundland and Labrador.
Knowing the importance of Voisey's Bay to the "have-not" province of Newfoundland and Labrador, CVRD also agreed to try to accelerate the project there by 12 to 18 months, which it said would deliver substantial economic benefits to the economy.
CVRD further promised to spend more money on exploration, research and development in the Sudbury Basin and in Thompson, promising to provide "long-term stability, growth and employment in Canada." Lastly, CVRD agreed to increase spending on apprenticeship programs for First Nations (as Canada calls its native population) and student employment programs and on environmental compliance programs.
CVRD had attempted to secure a North American foothold in 2004 by exploring a bid for Noranda, another nickel producer, but never got to the point of making an offer. With economic turbulence in Latin America, CVRD was keener than ever to do a deal when Inco and Falconbridge ended up in play. The Inco acquisition is the largest foreign takeover in Latin American history, creating the most powerful Brazilian corporate presence in North America.
CVRD has already combined its Brazilian Onca Puma and Vermelho projects with Inco's nickel assets in Canada and the PT Inco operations in Indonesia. There's talk now that CVRD's Sossego copper mine and its aluminium operations could be transferred to CVRD Inco as well. In addition, Agnelli says he's considering an initial public offering of CVRD Inco's base metal assets and a North American stock listing to help bankroll expansion plans. CVRD's capital costs are higher than competitors' because of Brazil's low credit rating.
Not that CVRD finance director Fabio Barbosa had great difficulty financing this huge cash transaction. The bid for Inco was facilitated by the availability of $34 billion in bridge financing, provided by a syndicate of 37 banks from North American, Brazil, Europe, Asia and Australia. To complete the transaction, CVRD actually borrowed $14.6 billion, less than half that amount. In December the company announced it had already refinanced 84% of the two-year bridge loan via three different bond issues in both U.S. dollars and Brazilian reais. Dollar-denominated notes issued in November got a BBB rating from Standard & Poor's.
So far, the only significant headache in the integration for CVRD has been Inco's troubled Goro nickel project in the French territory of New Caledonia. Production has been held up, and costs have escalated 40% to $3 billion. Goro was to have produced 60,000 tons of nickel a year starting in 2004. The startup is now 2008. Local aboriginal activist group Rheebu Nuu has alleged Goro will cause environmental damage on New Caledonia and sought a construction shutdown but succeeded only in stopping development of a waste storage plant.
Back in Sudbury, where Inco is the heart and soul of the community, there are still questions about the new owner's intentions. Rodriguez may be sanguine, but a recent column in The Sudbury Star asked whether the newly acquired Canadian mining assets hold as much significance for CVRD as they did for Inco and wondered if the Brazilian giant had taken on too much.
If the price of nickel were to collapse, the latter concern might prove valid. But the recent tumble in copper prices notwithstanding, even the most bearish analysts are predicting long-term stability for commodities in general and for nickel prices in particular. Nickel demand is expected to continue to grow at least through 2020. That, of course, is why CVRD (not to mention a few other companies) wanted Inco in the first place. - Laura King
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