Exclusive Update
On Dec. 5 Freeport-McMoRan Copper & Gold (NYSE: FCX) announced a deal that was not welcomed by the market. It's expanding into oil and natural gas drilling. Yippee.
The company said that it will pay $9 billion to buy two oil and natural gas exploration companies: Plains Exploration & Production (NYSE: PXP) and McMoRan Exploration(NYSE: MMR). Buyout premiums are 39% and 74% higher than their respective closing prices from the night before.
Shares of Freeport fell 15% when the market opened after the announcement.
The acquisition of Plains is a cash and stock deal valued at $50 per share. The McMoRan acquisition is all cash at $14.75 per share. In addition, McMoRan shareholders also get 1.15 units of a royalty trust per share they own. The trust gets 5% royalties on all future production from ultra-deepwater properties that McMoRan already owns.
The deal looks incestuous
The CEO of Plains sits on MMR's board, along with another Plains executive. Note, however, that Plains owns 31.5% of McMoRan, so this board membership is not unusual.
More disturbing is that seven of Freeport's 13 board members sit on McMoRan's board, accounting for half of the 14 seats there. Included in this count are the CEOs of each company (James Moffett of McMoRan and Richard Adkerson of Freeport), who each sit as co-chairman on the other company's board (as well as being president and chairman of their own respective company's board).
There is common history between Freeport and McMoRan. In 1988, the parent company, Freeport-McMoRan, spun of 20% of its operations, creating FCX which started to trade publicly. MMR was spun out of the same parent company in mid-1994. In 1995, the parent company, Freeport-McMoRan, was taken public. Given that, it's not too surprising that they share some board members. At the end of 1997, Freeport-McMoRan disappeared by merging with IMC Global, which is now part of Mosaic.
The fact that the two companies do not seem to be fully separate at the highest levels makes me question whether there was enough independent due diligence in reaching the deal between the two companies.
The deal looks like a bailout
The deal also appears to be a bailout of McMoRan in all but name. A little over a week ago, McMoRan announced that it is continuing to have difficulty getting a flow test from its Davy Jones well, located in the Gulf of Mexico, a requirement before production can begin. This heightened concern that the well is a dud and shares plummeted over 30% during the week.
If the well turns out to be truly unusable, it could affect the company's ability to obtain additional financing, according to one analyst's comments when the update was released. Now, however, it's getting a huge cash infusion from Freeport. Saved! Unfortunately, given that Moffett is the CEO and co-chairman of McMoRan as well as the co-chairman of Freeport, the transaction has the appearance of using one company to bail out the other. Not good.
A Lynchian deworsification?
You could argue that because of the close ties between McMoRan and Freeport, acquiring an oil drilling company won't "deworsify" Freeport away from its metal miner roots. But the fact that McMoRan has not turned a profit since 2002 (and has only done so twice going all the way back to 1995) doesn't make me think that's going to work out. If it's (essentially) the same board at the two companies, and one company makes lots of money (Freeport) and the other loses lots of money (McMoRan), what makes the former think it can rescue the latter? This could very well turn out to be a mistake.
We're just going to have to wait and see.
