* Freeport to pay $6.9 bln for Plains, $2.1 bln for McMoRan
* Deals allow Freeport to diversify into U.S. oil, gas
* Three-quarters of 2013 earnings to come from mining
* Freeport shares sink amid deal concerns
By Michael Erman and Julie Gordon
Dec 5 Freeport-McMoRan Copper & Gold Inc
struck a deal to buy Plains Exploration & Production Co
and McMoRan Exploration Co for $9 billion in a bold bid
to diversify into the U.S. energy sector as copper's prospects
But Freeport's shares tumbled 16 percent, and the cost of
protecting its debt against default soared, as investors and
analysts slammed the move as unnecessary.
The deal also means a huge windfall for the top executives
involved. McMoRan Chairman Jim Bob Moffett could collect $73
million cash for his shares, while Plains Chief Executive Jim
Flores stands to get $65.4 million for his. Flores is also in
line for a change-in-control payout of as much as $150 million.
On paper the deal reshapes Freeport, which is one of the
world's largest copper miners and is concentrated outside the
United States. Plains and McMoRan are concentrated in energy
plays in California, Texas and the Gulf of Mexico.
About a quarter of the combined company's 2013 operating
earnings would come from oil and gas, an attractive shift for
the company at a time when the U.S. is poised to become the
world's top oil producer.
But an influential London fund manager, representing one of
Freeport's top-five shareholders, publicly condemned the deal as
a betrayal of investors.
"I haven't heard anything on this call that in any way
justifies why these companies should be put together," Evy
Hambro, a managing director at BlackRock, said in the most
pointed comments on a contentious conference call that lasted
nearly two hours.
Units of BlackRock control 6.4 percent of Freeport,
according to Thomson Reuters data.
Hambro, like analysts earlier in the day, said Freeport
investors wanted copper exposure, and that if they wanted to
invest in oil and gas they could have done so directly.
Only a handful of major miners have diversified beyond core
metals and bulk commodities into oil and gas. Among these are
BHP Billiton, the world's largest diversified miner,
which sees its exposure to oil and shale gas, in particular, as
a key differentiating factor.
"When you include the assets as well as the production
upside Plains achieved from the recent Gulf of Mexico
acquisition, you have a formidable entity with a worldwide
presence," Global Hunter Securities analyst Curtis Trimble said,
referring to a recent deal Plains did with BP Plc.
The latest deal would also give Freeport new growth
opportunities. Analysts have said copper mining companies have
found it increasingly difficult to find new projects in
politically stable countries, and there are fewer deal targets
after almost a decade of mega-mergers.
"I do think it could partly reflect that the miners are
starting to look elsewhere," said Alex Terentiew, an analyst
with Raymond James Ltd in Toronto. "These are depleting assets,
and if you do not keep investing in new assets, come 10-20 years
down the road you're going to have nothing left."
Freeport is paying a premium of 39 percent for Plains and 74
percent for McMoRan, based on their closing stock prices on
Tuesday, for the chance to explore those new opportunities.
If successful, the deal would unite companies with a shared
history. 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.
Moffett is chairman of Freeport-McMoRan and also 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 deal.
Freeport shares dropped $6.11 to $32.17, erasing gains made
over the last five months. Its bonds sank and the cost of
protecting its debt against a default rose 11 percent.
Shares of both Plains and McMoRan Exploration rallied,
though some analysts said the deal undervalued Plains, which has
prospects in California and the Haynesville Shale in Texas.
"Any way you slice it, based on enterprise value, reserves,
it comes up to at least $60-$70 per share. I would be surprised
if a current Plains shareholder doesn't agitate for higher
value," Morningstar analyst Mark Hanson said.
Freeport said it would pay $25 cash and 0.6531 shares of its
common stock for each Plains share, adding up to $50 per share,
or a total deal value of $6.9 billion.
In the other deal, Freeport will pay $14.75 cash for each
McMoRan share, or $2.1 billion, after taking into account shares
of McMoRan that Freeport and Plains already own. McMoRan
shareholders would also get 1.15 units of a royalty trust for
each share held.
Plains shares rose 23.4 percent to $44.50, while shares in
McMoRan rose 87 percent to $15.84. The sharp swings in share
prices meant that Freeport's offer for Plains was worth $4 less
per share than when it was announced.
People familiar with the merger, speaking on condition of
anonymity, said that neither deal was conditional on the other.
Moffett will continue as chairman of the combined entity
after the deal closes and Freeport's Richard Adkerson will be
president, chief executive and vice chairman. Flores will be
vice chairman of Freeport and CEO of the oil and gas operations.
The corporate headquarters will be in Phoenix.
J.P. Morgan Chase has agreed to provide $9.5 billion in
financing, Freeport said, to cover the cash considerations and
to repay Plains' term loans and revolving credit line.
Credit Suisse was financial adviser to the special committee
of Freeport's board, and Wachtell, Lipton, Rosen & Katz was
Evercore Partners was the financial adviser to the special
committee of McMoRan's board, and Weil, Gotshal & Manges was
For Plains, Barclays served as financial adviser, and Latham
& Watkins was the legal adviser.