TORONTO KGHM's C$3 billion ($2.96 billion) bid for Quadra FNX is widely being viewed as a low-ball offer, and its proposal may well result in a full-blown bidding war for the Canadian miner, which controls one of the world's largest undeveloped copper projects.
Even though copper prices have pulled back in the wake of the euro zone debt crisis and economic uncertainty in other parts of the world, analysts believe a dearth in large-scale copper assets bodes well for the price of the metal.
Given the promising outlook for the red metal, Quadra's controlling stake in the $3 billion Sierra Gorda copper-molybdenum project in Chile could well draw some of the world's largest base metal miners into a bidding war.
Investors are already betting that the friendly bid by the Polish miner is far from a done deal. Quadra FNX closed at C$15.88 a share on Tuesday, well above the C$15-a-share offer price, signaling anticipation of a sweeter bid.
While Quadra has advised its shareholders to vote in favor of the KGHM offer, market sentiment suggests the two sides would struggle to attain the two-thirds majority required for the deal to proceed.
Stifel Nicolaus analyst George Topping believes large base metal miners such Antofagasta and Xstrata might want to take a close look at Quadra, especially given the geographic overlap that the companies share with Quadra in North and South America.
"We note that the break fee is only 2.1 percent, which is low, so we would expect the potential for other bidders," said Topping, who pegs Quadra's net asset value (NAV) at about C$20 a share.
"On a NAV basis, it's a low bid. ... At the very least, I think there will be a higher offer from KGHM to encourage Quadra shareholders," he added.
NO AUCTION PROCESS
Quadra also said it did not conduct an auction process, before reaching the friendly deal with KGHM, giving further credence to speculation that rival bidders may emerge if given the opportunity to conduct a due diligence process.
Although Quadra's deal with KGHM prevents it from actively soliciting rival bids, Quadra's management on a conference call confirmed that nothing in the agreement would preclude it from allowing a rival bidder to study its books should a potentially superior offer emerge.
Cormark Securities analyst Cliff Hale-Sanders says the bid for Quadra is well below the net asset value multiples paid in other recent base-metal acquisitions, including the multiple that Barrick Gold paid earlier this year to acquire Africa-focused Equinox.
"In our view, based on the current bid, the Polish company is essentially paying for the operating assets and getting the development assets and exploration upside at Robinson for free," said Hale-Sanders in a note to clients.
"We do believe there is room for another bidder to come in and still realize value," he said, naming Teck Resources and Vale as potential suitors.
Scotia Capital analyst Tom Meyer describes KGHM's offer for Quadra is opportunistic as the Vancouver-based company's shares were among the most inexpensive in the sector.
"It is clear to us that the market price was the key driver of this deal and became the reference price which drove the final offer price," said Meyer in a note to clients.
Shares of Quadra still trade below the stock's 52-week high of C$17.55. Analysts believe the stock was at the cusp of regaining upward momentum following recent operational improvements at the company's Robinson copper-gold mine in Nevada.
"I see Quadra FNX as a company the market has perceived as a serial disappointer and its depressed the price of Quadra FNX's shares to a remarkable extent," said Salman Partners analyst Raymond Goldie.
"I can see just over C$28 worth of value in the company, so my belief is that this is the beginning of a bidding war."
($1 = 1.0133 Canadian dollars)
(Editing by Frank McGurty)