Freeport downgraded as analysts question shift into energy, stock slips
(Reuters) - Shares of Freeport-McMoRan Copper & Gold Inc (FCX.N) fell further on Thursday, a day after it said it had struck deals to expand into energy by acquiring Plains Exploration & Production Co PXP.N and McMoRan Exploration Co MMR.N for $9 billion, and at least four analysts downgraded the miner's stock.
The transactions, valued at $19.6 billion including debt, were lambasted by investors and analysts alike as being unnecessary and a distraction from Freeport's copper business.
Freeport shares fell 5 percent to a 15-month low of $30.58 in morning trade before recovering slightly. The stock fell 15 percent on Wednesday after the announcement of the deals.
The investor backlash was exacerbated by the disclosure after the announcement that shareholders won't be allowed to vote on the deal, meaning the only way they have to express their dissatisfaction is to dump the stock.
"We believe that Freeport stock will remain in the penalty box for the foreseeable future and multiples will remain depressed on the back of these acquisition announcements, given investor uncertainty on the strategic merit," analysts at Goldman Sachs wrote in a research note.
The move into oil and gas means the company will lose its status as a pure-play copper and gold miner, analysts said.
"Freeport's diversification into oil and gas arguably removes a key investment draw of the company in its copper exposure," BMO Capital Markets analysts wrote.
Evy Hambro, a managing director at BlackRock, one of Freeport's top-five shareholders, condemned the deal on Wednesday, saying there was no reason why the three companies should be put together.
Plains shares, which rose 23.4 percent on Wednesday, were down 2.2 percent at $43.48 while McMoRan Exploration's shares, which had risen 87 percent, were down 3.4 percent at $15.27.
The deal's high debt component was also viewed as negative.
Standard & Poor's cut its rating outlook on Freeport to negative from stable, including the company's BBB corporate credit rating. "The negative outlook on Freeport reflects the leveraged nature of the proposed acquisitions, as well as risks associated with integrating the targeted companies," S&P said.
The cost of protecting debt issued by Freeport against potential default fell slightly after rising sharply on Wednesday immediately after the deal announcement.
Five-year credit default swaps were 1.5 basis points tighter at 153 basis points. That means it costs $153,000 a year to protect $10 million of debt for five years. The CDS widened about 12 percent on Wednesday.
Yield spreads on the company's 3.55 percent bonds due March, 2022 widened another 4 basis points to 206 basis points over 10-year Treasuries.
Freeport said on Wednesday that the rationale for entering into the deal was to use low-cost financing available to the company to make attractive investments.
But analysts including Citigroup's Brian Yu said there was no or little strategic fit or rationale for the deal.
Yu said he expected the deal to dilute Freeport's 2013 earnings per share by 3.2 percent.
The Goldman Sachs analysts said Freeport would have to address investor concerns about the valuations of the deal, considering cross-ownership and management links among the three companies.
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.
Jim Bob Moffett is chairman of Freeport-McMoRan and 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.
Some analysts said the $6.9 billion deal for Plains undervalued the company, while $2.1 billion for McMoRan was on the high end.
"If the high risk ultra-deep drilling does not work, Freeport greatly overpaid for McMoRan in our view," analysts at RBC Capital Markets said.
McMoRan has struggled with delays at its Davy Jones deep gas prospect off Louisiana.
Analysts at Nomura said the high debt load made a special dividend less likely and eroded any takeover premium in Freeport's stock.
Nomura cut its price target on Freeport's stock to $36 from $40, while UBS decreased its target $40 from $47.
Freeport shares were down 3.9 percent at $30.91 in early afternoon trading on the New York Stock Exchange.
(Reporting by Swetha Gopinath in Bangalore; Editing by Ted Kerr)
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