INCO FORGES NICKEL GIANT
Falconbridge’s agreed break fee under fire
Falconbridge Ltd.’ s decision to pay Inco Ltd. US$320-million should the latter’s friendly takeover bid fail is “absolutely outrageous” and could block rival offers for the company, corporate governance critics said yesterday.
The proposed deal, which would create the world’s largest nickel miner with a market value of US$24.3-billion, operations on six continents and 25,000 employees, must be approved by Falconbridge shareholders and regulators in Canada, the United States and Europe.
Scott Hand, Inco’s chief executive, and his counterpart at Falconbridge, Derek Pannell, described the proposed payout as “ pretty standard” during a conference call yesterday to announce Inco’s $ 34- per- share offer.
But shareholder advocate Stephen Jarislowsky argued paying Inco a 3.5% fee if the miners’ $12.8-billion marriage breaks up amounts to a “ bribe.”
Break fees are typically paid to compensate companies for the time they spent putting together a bid if it’s topped by a rival offer.
“That is absolutely outrageous,” said Mr. Jarislowsky, head of Montreal investment manager Jarislowsky Fraser Ltd. “It should be less than 1% [of the deal’s value]. The break fee should be your outofexpenses if the deal doesn’t succeed. That probably wouldn’t even be $ 1- million.”
Mr. Jarislowsky took aim at Falconbridge’s board for approving the fee.
“I don’t mind Inco asking for the break fee,” he said. “ I place the blame on the directors of Falconbridge — they abdicated in their responsibility to shareholders.”
Added an analyst who covers Falconbridge: “It’s a pretty hefty fee. It’s not insurmountable [ for a rival bidder], but it’s not insignificant either.”
Mr. Hand, who will be the new company’s CEO, said Chinese demand for nickel is growing at a furious pace while European orders are also picking up. That demand comes as Inco is set to realize production from the long-awaited Voisey’s Bay project in Labrador.
The combined entity will save about US$350-million annually and produce 735 million pounds of nickel this year, rising to as much as one billion pounds by 2009, the executives said.
That figure puts Inco well above Russia’s OAO GMK Norilsk Nickel, currently the world’s largest nickel maker. Norilsk will produce about 529 million pounds of nickel this year.
“ This is a great deal,” said Victor Lazarovici, analyst at BMO Nesbitt Burns in New York City. “It’s been so obvious for so long that these two asset bases belong together.”
Bill Belovay, a fund manager at Jones Heward Investment Management Inc. in Toronto, said the merger cements Canada’s place in the global mining sector.