Timing is everything. Just ask Freeport-McMoRan Copper & Gold Inc. In March 2007, the mega-mining company pulled off an extraordinary merger with a much larger mining company, one that required financing the $18.5 billion cash component of the total $26 billion acquisition price to buy Phelps Dodge Corp. "We moved quickly and seized the moment," says Kathleen Quirk, executive vice president and CFO of Phoenix-based Freeport-McMoRan.
They sure did. When the merger was finalized, it was the largest transaction ever in the mining industry's history. In early 2007, Freeport-McMoRan (FCX), despite a position as one of the world's top mining operations, was limited by its position owning but a single mine, albeit one of the best in the world. Located in Indonesia, the Grasberg copper and gold mine constrained the valuation of FCX's stock and contributed a perception of higher risk among creditors. "Our share price was affected by the perceived political risk of having just a single asset in Indonesia," Quirk explains.
Phelps Dodge Corp. offered a portfolio of geographically diverse copper mining operations from the United States to South America to a development project in Africa, although none of them matched the deposit size of Grasberg. In short, the two companies matched up well, asset-wise. "We had strong shareholder support from both companies," says Quirk. "We realized we could both grow more aggressively together than we could apart."
Matching up well and then actually merging are two different things, however. FCX initially had hoped to fund the deal with 50 percent cash and the remainder with equity, but Phelps Dodge held firm to a 70 percent cash transaction. To pull off the feat, FCX had to finance $18.5 billion--not a walk in the park it turned out. To raise this level of financing required for a non-investment grade issuer, FCX and its underwriters JPMorgan Chase and Merrill Lynch tapped multiple segments in the capital markets. The commercial bank market was targeted for five-year, $1.5 billion revolvers and a $2.5 billion Term Loan A facility. The institutional market provided the 7-year Term Loan B. A $6 billion bridge loan commitment for the balance came from the proceeds of a three-tranche, high-yield senior notes offering in the public debt market. "This was a lot of leverage put on the company, and right after the deal closed we went to the market with an equity offering to de-risk the transaction," Quirk notes. "The offering was very well received and it took a lot of pressure and leverage off very quickly. Through the remainder of the year we used cash flows to pay off the rest of the debt." Could FCX pull off the same thing today? Says Quirk succinctly: "No way."