Freeport-McMoRan Copper & Gold Inc (FCX.N) appears to be in a win-win situation as Plains Exploration shareholders prepare for Monday's vote on the miner's nearly $6 billion takeover bid, part of its strategy to expand into energy.
Plains Exploration & Production Co's PXP.N share price, now hovering below the bid price, suggests that investors feel Freeport's current offer could fall short. Analysts and investors see a razor-thin margin no matter which side carries the vote.
Even so, Freeport's shares could rise whether Plains shareholders vote for or against the deal as it now stands.
A "yes" vote would lift the uncertainty surrounding Freeport since it announced its proposal in December, while a "no" vote would relieve investors concerned about the deal price and the prospect of Freeport losing its tight focus on copper.
All bets are off, however, if Freeport sees the bid heading for defeat and decides to sweeten the pot, despite its signal last week that it had no intention of doing that. A higher offer could further pressure its shares, which are already down more than 16 percent since the deal was announced.
"There is a decent chance that they do not get the vote right now based on the current deal terms," said King She, a special situations analyst for Susquehanna Financial Group.
"Despite what Freeport said last week about this being the best and final bid, people are still betting that they will increase the deal terms a little bit to get the deal done."
Freeport, the world's largest listed copper producer, shocked the market in December when it said it would buy Plains, along with McMoRan Exploration Co MMR.N, in a combined deal then valued at about $9 billion.
Among Freeport's shareholders, opponents see the diversification move as a pricey distraction.
"You went to sleep one night thinking you were owning a blue-chip copper play, and you woke up the next making a pretty big bet on U.S. oil and gas," said Daniel Rohr, an analyst with Morningstar. "Justifiably, Freeport investors were annoyed."
Meanwhile, two prominent proxy advisory firms - ISS, or Institutional Shareholder Services Inc, and Glass Lewis & Co - are urging Plains shareholders to vote "no," saying Freeport's offer is too low. Some institutional investors automatically vote on the recommendations of proxy advisory firms.
When made public, Freeport's cash-and-stock bid was worth about $50 a share, a nearly 39 percent premium to Plains' share price at the time.
But Freeport's shares have slid since then, weighed down by the negative sentiment surrounding the deals and falling copper prices. As a consequence, the value of the cash-and-stock offer has receded to around $46 a Plains share.
That has prompted CR Intrinsic Investors and Arrowgrass Capital Partners - which own roughly 3.8 percent and 3.6 percent of Plains' shares, respectively - to speak out in opposition. They argue that Plains is worth as much or more on its own.
"We are confident that Plains shares would trade at or better than current levels in the absence of the Freeport proposal," Arrowgrass partner Michael Edwards wrote in a letter to Plains' board earlier this month.
Last week, Freeport said it would not raise its bid. Plains shares, which had traded above the value of the Freeport offer since mid-march, closed the week 2 percent lower. That put them below the value of the Freeport bid where they have remained.
Plains shares closed at $45.12 on the New York Stock Exchange, still below the offer price.
"If you were 100 percent confident that the deal was going to go through, on the existing terms ... the stock should be trading pretty close to parity," said Jorge Beristain, a mining analyst at Deutsche Bank who covers Freeport. "So that seems to indicate there's the risk that the deal does not happen."
Plains shareholders are set to vote at a shareholder meeting in Houston on Monday. Approval requires support from investors owning 50 percent of Plains' outstanding shares, not 50 percent of the shares voted. That means that shares held by investors who do not participate count as "no" votes.
On the flip side, Plains has attracted a large number of arbitrage investors, commonly known as arbs, who are usually after a quick payout rather than looking to invest in a company's long-term prospects.
"There's a huge percentage of arbs that own the stock and the arbs are likely to vote 'yes' across the board," said RBC Capital Markets analyst Leo Mariani, who covers Plains. "Arbs are focused on guaranteed money. If they punt on the deal, they become fundamental shareholders or they sell the stock, neither of which is a great outcome for them."
Freeport revealed on Thursday that nearly 46 percent of Plains shareholders have chosen to receive Freeport shares as payment in the proposed deal, with 29 percent choosing cash and the remainder not submitting valid votes.
Paulson & Co, a hedge fund that ranks as Plains' largest shareholder with a nearly 10 percent stake, is likely to be instrumental in the success or failure of Freeport's bid. It has not made its voting intentions known, however.
(Reporting by Michael Erman in New York and Julie Gordon in Toronto; Editing by Frank McGurty and David Gregorio)