Xstrata had to bid for Falconbridge. It was only a question of when and at what price. The Anglo-Swiss mining group probably realized months ago it had nothing to lose, financially speaking, by lunging after Canada's second-biggest nickel producer.
Xstrata will either win Falconbridge at a price acceptable to shareholders — its opening bid this morning was $16.1- billion. Or it will make a fortune by forcing Inco to pay more for Falconbridge. Xstrata bought 19.8 per cent of Falconbridge last August at $28 a share. Since then, the shares have roughly doubled in value, thanks to a rocket-propelled commodity boom and Inco's improved offer for Falconbridge, made Saturday. If Xstrata were to declare itself hors de combat today, it would walk away with a profit of $2-billion or so. Not bad for nine months work.
But Xstrata has a lot to lose on the reputation front if Falconbridge goes to Inco. Xstrata boss Mick Davis has already lost one big acquisition in his Ahab-like quest to join the ranks of the top five mining companies. Early last year it went after, and lost, Australia's WMC Resources, which went to BHP Billiton. Losing a second — Falconbridge — wouldn't be dismissed as bad luck. It would look sloppy, perhaps incompetent, $2-billion profit or not.
Xstrata, though, has a good chance of winning the Falconbridge prize. Its $52.50 a share offer, unlike Inco's, is all cash. Unlike Inco, Xstrata has no apparent competition issues. The European Union competition authorities could prove to be Inco's undoing. The Inco-Falconbridge merger has been delayed several times because the EU is worried about the merged companies' dominance in certain nickel alloys used to make, among other things, jet engine parts.
This, of course, does not mean Xstrata's bid for Falconbridge won't be reviewed by Investment Canada and possibly by its American equivalent. The name Marc Rich will undoubtedly come up. Mr. Rich is the fugitive financier who was mysteriously pardoned by President Bill Clinton on his last day in office. He formed Glencore International, which owns 40 per cent of Xstrata. Glencore is not longer associated with Mr. Rich, but is run by a gaggle of his former lieutenants. American and Canadian investment officials might want to explore the Glencore-Xstrata links more fully.
Xstrata's other advantage is Vancouver's Teck Cominco. If the battle for the heart of the Canadian nickel and copper industry were not complicated enough, Teck has bid for Inco. The offer was dismissed as a non-starter by the Inco board last week. But with Xstrata going after Falconbridge, Teck's offer for Inco can only gain credibility. Absent a deal with Falconbridge, Inco's shareholders would have the opportunity to cash in on Teck takeover premium.
This story is far from over. Anglo American and Rio Algom, two mining giants who crave nickel assets, are flush with cash and on the prowl. Either could bid for Inco, or Inco and Falconbridge together.
As of today, Xstrata has the regulatory and financial advantage. It's the offer to beat. And Xstrata's worst-case scenario — losing Falconbridge to another bidder — would still prove extremely lucrative for Xstrata shareholders.
