Freeport-McMoRan Copper & Gold (NYSE:FCX) has demonstrated in spades this week that it's not wise for analysts and investors to become too smitten with a company. That's because one of the adventurous aspects of the world of investing is that each day represents a brand-new opportunity for the emergence of left-field-generated surprises by publicly held corporations.
So it was on Wednesday with an announcement by Freeport that it would acquire Plains Exploration & Production Company (NYSE: PXP) and McMoRan Exploration (UNKNOWN:MMR.DL). The world's largest publicly owned copper producer will pay $6.9 billion in cash and stock for Plains, and $2.1 billion for McMoRan, net of the 36% of the latter company already owned by Freeport-McMoRan and Plains. Add in the assumption of $11 million in debt that'll come with the deal(s), and you have an all-in bill to Freeport of $20 billion.
Counting the caveats
Before we venture further, you need to know a few things about the announced deals. First, the presence of "McMoRan" in the names of the acquirer and one of the companies being bought is hardly coincidental. McMoRan exploration and Freeport formerly were siblings, with the oil and gas company having been spun off in 1994. Second, obviously owing to the prior relationship, Freeport's chairman, James Moffett, is also CEO and co-chairman of McMoRan.
Third, James Flores, the current Plains CEO, sits on the McMoRan board, owing to his company's 31.5% stake in the smaller, primarily shallow-water Gulf of Mexico and Gulf Coast producer. According to some calculations, he stands to reap as much as $150 million from the sale of Plains. Fourth, there are other overlaps, especially between Freeport and McMoRan. For instance, Kathleen L. Quirk serves as both CFO of Freeport and senior vice president and treasurer of McMoRan.
It may be that none of these combinations represents an abrogation of an arm's length relationship per se. But it just might be that the arm stops at the elbow in this case.
Is Davy Jones forever sunk?
The announcement of the deal also follows closely a disclosure in late November by McMoRan that it has yet to achieve a flow test on the Davy Jones No. 1, its ultra-deep Gulf of Mexico well. With nearly $1 billion sunk into that project, there's little wonder that the company's share price had fallen by 26% in the week and a half between that disclosure and the acquisition announcement.
It's important for me to confess that I've long been positive on Freeport. Indeed, I've felt that the company has been well-managed, that its long-lived assets and geographic spread are substantial positives, and that the virtually across-the-board expansion of its already attractive asset base would stand the company -- and, by extension, its shareholders -- in good stead well into the future.
At the same time, I'm less of a purist than some who have commented on the announced combination. Yes, I've been attracted to Freeport in part because of its status as a nearly pure copper and gold play. But at the same time, I've also been a proponent of the concerted movement of the largest of the world's mining companies, BHP Billiton (NYSE:BHP), into energy operations. That, despite BHP's recent writedown of the lion's share of its energy assets, including those acquired from Chesapeake Energy (NYSE:CHK) in the Fayetteville Shale.
But there's something about Freeport's proposed acquisition of Plains and McMoRan that takes me back several years when I sat in a packed auditorium in New York while executives from AOL and Time Warner attempted to explain the wisdom behind the merger of their two companies. That purported wisdom remained forever illusory, and the company that had been cobbled together unraveled in almost no time flat.
With a genuflection toward the obvious differences between media and natural resources, my feelings about this combination are not dissimilar from those I had about Time Warner's new relationship slightly more than a decade ago. In the most recent case, my confidence in the wisdom of the combination is hardly buoyed by a deal that my colleague Jim Mueller has termed "incestuous."
Whether that adjective fits, I'm not sure. Nevertheless, there are obviously other ways to invest in both copper or oil and gas. That being the case, my inclination is to remain on the sideline relative to Freeport-McMoRan, until other aspects of the proposed combination become more apparent.