Payoffs and Headaches With the New Deals
Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In late December of 2012, Freeport-McMoRan (NYSE: FCX) announced that it would make two blockbuster purchases of fellow raw materials exploration and extraction companies. The first was a $6.9 billion deal with hot oil-and-gas exploration newcomer Plains Exploration Corporation (NYSE: PXP). The second was a long-anticipated transaction that would require it to repurchase all of the outstanding shares of its McMoRan Exploration (NYSE: MMR) subsidiary.
Although these twin deals have been subject to a number of twists and turns since their initial announcement, they have both come into sharper focus since December. It is now widely anticipated that the Plains deal will go through as currently planned. While the success of the current iteration of the McMoRan Exploration merger is not assured, it seems likely that the transaction will still close in one form or another. However, shareholder-initiated litigation and a potential conflict-of-interest tussle may require Freeport-McMoRan to withdraw its current offer and float a higher buyout proposal for the company. Whereas the Plains deal could close as early as the end of the second quarter of 2013, the Exploration deal may have to wait a while longer.
About Freeport-McMoRan Copper & Gold, Plains Exploration and McMoRan Exploration
Phoenix-based Freeport-McMoRan is a diversified exploration firm that actively seeks deposits of gold, silver, copper, molybdenum and other specialty metals around the world. The company has operations in the Americas, Africa, the Asia-Pacific region and certain other areas. Some of its most profitable deposits lie in sub-Saharan Africa and Indonesia. Although its proven reserves fluctuate from year to year, Freeport currently has at least 115 billion pounds of copper, 3.4 billion pounds of molybdenum, 32 million ounces of gold, and similarly enormous quantities of various other metals. The company earned about $3 billion on $18 billion in 2012 gross revenues and employs around 34,000 people.
Houston-based Plains Exploration seeks out and develops deposits of oil and natural gas in California, Colorado and the Gulf Coast area. It also maintains some lucrative offshore properties in the Gulf of Mexico. Plains has at least 440 million barrel-equivalents of oil on hand. In 2012, the company earned $306.4 million on $2.6 billion in gross revenues.
New Orleans-based McMoRan Exploration is an independent oil and gas producer that owns and operates onshore and offshore properties around the Gulf of Mexico region. With about 1,000 current leases and a strong grasp on cutting-edge horizontal drilling technologies, the company appears to be able to access many "borderline" deposits that may be too expensive for other companies to exploit. McMoRan Exploration lost $138.3 million on $376.9 million in gross 2012 revenues.
How the Deals Were Structured
Under the terms of the Plains deal, Freeport will issue cash payments of $25 per share to all Plains shareholders. In addition, it will issue 6.351 Freeport shares for every 10 shares of Plains that the company's shareholders own. At Freeport's current share price, this values Plains at about $46.60. Relative to Plains's current share price near $46.50, this offers a negligible premium.
As it currently stands, Freeport will pay current McMoRan Exploration shareholders $14 in cash for every share that they own. In addition, it will issue 1.15 units of a special trust that has been set up to capture at least 5 percent of Exploration's future receipts from its underwater drilling operations. Although this second portion of the transaction is a major wild card, most market-watchers value these offshore receipts at around $2 per unit. Accordingly, the deal values Exploration at roughly $16.30. Relative to its current share price of $16.33, this represents a negligible discount.
Complications and Other Issues
Whereas the Plains deal is all but assured to clear the remaining regulatory and shareholder-related hurdles that it faces, the Exploration deal is still up in the air. At issue are allegations of "insider dealing" as well as insinuations that Freeport moved quickly to take full control of its subsidiary after the surfacing of negative reports about one of the smaller company's deep-water wells.
While the extent of Exploration's drilling problems remain unclear, a consensus is emerging that Freeport's bid for Exploration dramatically undervalues the company. At the same time, it is important to note that Freeport's management team may well have an inside view of the extent of the problems at Exploration. If the drilling issue is worse than previously reported, Freeport's offer may be closer to Exploration's true value.
In sum, both of these deals have the potential to enrich shareholders of the bought-out companies. Investors who seek a way to play Freeport's buying spree would do well to buy into Plains at these levels and accept the small premium that may still be available to them. Alternatively, risk-conscious investors could purchase Freeport at these levels in the hopes that the Exploration deal will fall through completely. If this occurs, it is likely that Freeport's stock will shoot back up to its pre-merger levels.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!