ONE OF CANADA'S LARGEST MINING COMPANIES MAY BE SOLD TO A U.S. BUYER TO BENEFIT SHAREHOLDERS
For months, the two opponents had debated the company’s future during informal conversations in the lobby of the gleaming downtown Toronto office tower where they both worked. When it came time to deliver the decision last week, William James, 60, the husky, unpretentious chairman of Falconbridge Ltd., took an elevator up five floors to call personally on Alfred Powis, 58, the polished chairman of Noranda Inc. For more than a year, Noranda, which is controlled by financiers Peter and Edward Bronfman, has been patiently stalking Falconbridge, the Toronto-based nickel giant. And for just as long, James has been searching for a friendly buyer to keep his company out of Noranda’s hands (page 37). On Wednesday, Aug. 2, James informed his Noranda counterpart that he intended to sell Falconbridge to AMAX Inc., a Greenwich, Conn.-based resources company. Powis reacted calmly to the bombshell. He told Maclean’s, “Bill is just trying to get the best deal possible for his shareholders.” But by week’s end, Powis said that he was pondering his next move.
AMAX’s stunning bid clearly caught Noranda by surprise. For the past year, the Toronto-based resource conglomerate’s stockbrokers have been buying Falconbridge shares on the open market with an eye on eventually assembling a control block in North America’s second-largest nickel producer (after Toronto-based Inco Ltd.). By last week, Noranda had picked up 27 per cent of the Falconbridge shares through its so-called creeping takeover. Companies often resist such a takeover because it does not allow them to obtain the premium price—a share price greater than market value—that usually accompanies a bid for a controlling block of shares. But AMAX’s entrance into the fray has turned up the heat in the year-old takeover saga. The U.S. mining giant has offered to pay $36.12 for each of the 77.9 million Falconbridge shares, which had been trading for as little as $27 last month. For good measure, the Falconbridge board—which has expressed full support for the foreign offer—has granted AMAX an enticing stock conversion plan and has instituted a new shareholder’s rights program that effectively blocks Noranda from raising its stake any further without bidding for all of the stock.
In one respect, the battle for Falconbridge reflects the takeover fever already sweeping through the United States and Europe. But AMAX’s bid—which would be the fourth-largest acquisition in Canadian history—has raised new concerns among nationalists over the growing numbers of Canadian companies being taken over by foreign firms. Indeed, last week, millions of shares of Canadian Pacific Ltd. changed hands on rumors that an American corporate raider was considering making a bid for the transportation, resource and telecommunications giant. And that has prompted renewed criticism of Investment Canada, which examines acquisitions by foreign companies in Canada. Noting that Investment Canada has never turned down a foreign acquisition or merger, federal New Democratic Party finance critic Lorne Nystrom said, “It is not even a toothless tiger—it is a toothless pussycat.”
For the moment, however, the deck appears stacked in AMAX’s favor, even though its bid is conditional on winning two-thirds of the shares. James and the rest of the Falconbridge board say that shareholders should accept AMAX’s offer. But the Falconbridge board is not taking any chances. As a further lure, once it acquires 56 per cent of Falconbridge, AMAX has the option to purchase $356.7 million debentures convertible into 9.875 million Falconbridge shares. Converting the debentures would push AMAX’s ownership to about 68 per cent.
And Falconbridge’s strategy to fend off Noranda also includes a so-called poison pill provision. The provision requires that any shareholder with 15 per cent or more of Falconbridge that wants to increase its stake further must bid for all the remaining shares. If it refuses to do so, the other shareholders have the right to purchase treasury shares at half their market price. That increases the total number of shares outstanding, and also reduces the percentage of stock held by any one shareholder. This so-called dilution provision also makes a bid for the company prohibitively expensive, since many more shares would have to be acquired. As a result, the pill essentially blocks Noranda’s creeping takeover by making a bid to all shareholders less expensive than the gradual accumulation of shares through a stock exchange.
While common in the United States, poison pills are rare in Canada, where there are no firm regulations governing them. Last week, Noranda’s lawyers said that they were considering challenging the legality of Falconbridge’s poison pill. But Garfield Emerson, the well-known Toronto securities lawyer who drafted Falconbridge’s provision, expressed confidence that it will meet provincial law and securities regulations. “It is a nonsteroid vitamin pill,” he told Maclean’s. He added that, to allow Noranda to proceed with its creeping takeover of Falconbridge “would be inherently coercive and abusive to shareholders.”
For his part, Powis would shed little light on Noranda’s next move. He told Maclean’s that the Noranda board had not decided whether to up the ante and try to outbid AMAX—or to simply “laugh all the way to the bank” and tender its Falconbridge shares to AMAX for an estimated profit of $221 million. Late last week, some analysts even mentioned the possibility that Noranda might try to buy AMAX outright—an option that Powis did not rule out. Many analysts, however, expressed skepticism that Noranda will make a higher bid. In the past, the company has balked at buying more of Falconbridge because it felt that prices, even in the $30 range, were too expensive. Concluded Alexander Doulis, a Toronto-based mining analyst with McNeil Mantha Inc.: “Noranda would be reluctant to pay full buck.” Part of the reason for that is that Noranda only really wants one thing from Falconbridge—the precious Kidd Creek copper, zinc and silver mine near Timmins, Ont. Discovered by U.S.-based Texasgulf Inc. in the 1960s, Kidd Creek eventually became part of the Canadian Development Corp., a now-defunct Crown corporation set up to promote Canadian ownership in strategic industries.
The rivalry between Falconbridge and Noranda really began in 1985, when the CDC decided to sell off the mine, along with some other assets. While Noranda tried to set up a joint venture, James pulled off a major coup by buying Kidd Creek outright for a total cost of $1.3 billion. But Noranda was bent on owning Kidd Creek—even if it had to buy all of Falconbridge to do it. Powis’s chance came last May when Placer Dome Inc., one of the world’s largest gold mining companies, decided to put its 25-per-cent block of Falconbridge stock—the single largest holding—up for sale. Concerned about its independence, Falconbridge managed to buy back its own shares for a combination of cash and special dividends. But that move left Falconbridge without a single large shareholder. Seeing its opening, Noranda instructed its brokers to start buying shares. Slowly but steadily, Noranda began muscling its way into Falconbridge and putting pressure on James to make a deal.
The Falconbridge chairman scrambled to find a rescuer. Then, out of the blue, he received a call on June 23 from Allen Born, the tough, 56-year-old chairman of AMAX, a widely diversified U.S. mining giant. Born was no stranger to the Canadian mining business—or to James. Before leaving to head up AMAX in 1985, he was chief executive at Placer Development Ltd., which later became Placer Dome, where he was joined on the board by James. This June, Born had called to discuss joint-venture projects. But the conversation quickly turned to the unwanted attention Noranda was paying to Falconbridge. And out of that call evolved last week’s bid. “I got talking about the company, and they got interested,” James told Maclean’s. “Allen looked into it a bit. They liked it more. So they made an offer.”
If successful, Falconbridge will be by far AMAX’s biggest acquisition. But it will not be the first. From its roots as a molybdenum producer, AMAX expanded heavily during the 1960s and 1970s, eventually holding interests in several different minerals. But since Born took over in 1985, the company has sold $1.2 billion worth of assets and spent another $780 million on acquisitions. Even so, some investment analysts expressed concern with the large debtload that AMAX would have to pile up to finance the $2.8-billion Falconbridge deal. But those same analysts agree that Born is willing to pay top dollar for Falconbridge. Both the nickel operation in Sudbury and the precious Kidd Creek mine are low-cost, internationally competitive producers. And, as Born told reporters and financial analysts in New York last week, “These pieces are worth more than I’m paying for the whole.”
But the prospect of one of Canada’s biggest mining companies being sold to an American firm drew angry criticism from economists and nationalists throughout Canada. Particularly galling is that, if AMAX is successful, the valuable Kidd Creek mine would be back in U.S. hands after the CDC had gone to such great lengths to keep it Canadian. “This is one of Canada’s crown jewels in the resources sector,” said Terence Ortslan, Montreal mining analyst with brokerage house Deacon Morgan McEwen Easson Ltd. “You can’t replace a Falconbridge.”
Some analysts, including Ernest Nutter, who works in Toronto for Dean Witter Reynolds (Canada) Inc., say that Canadian companies are attractive takeover candidates simply because their shares sell at cheaper prices than do those for comparable companies in other countries. But others blame the Free Trade Agreement for the massive sell-off of Canadian assets to U.S. buyers this year. Said University of Toronto economist Mel Watkins: “Once we signed the agreement, we should have known this was going to happen.” If AMAX is successful in taking over Falconbridge, that criticism will undoubtedly increase.
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