Break fees turn takeovers into friendlyunions

“ They’ve managed to produce a powerhouse,” he said.

Buying Falconbridge also gives the new company, to be named Inco Ltd., access to zinc and aluminum assets, along with a bigger share of the copper market.

Together, the pair would have generated US$6.4-billion in sales for the six months ended June 30, Inco said.

Meanwhile, Lee Fullerton at the Ontario Teachers’ Pension Plan, which owns Falconbridge shares, said the pension manager is still reviewing Inco’s offer.

“If we like the deal, we likely won’t have an issue with the break fee,” she said.

About 20% of Falconbridge’s shares are owned by Switzerland’s Xstrata Plc, which bought the stake earlier this year.

Xstrata’s chief executive has said he planned to buy more Falconbridge shares and the company is seen as a likely candidate to launch a competing bid.

Yesterday, Messrs. Hand and Pannell said Xstrata alone cannot block the proposed deal.

To beat Inco’s offer, any suitor must top the $34 per share bid — or an alternative 0.6713 Inco shares plus 5¢ in cash — and absorb the break fee.

“ It’s definitely a deterrent,” said Bill Mackenzie, president of Toronto- based shareholder watchdog Fairvest Corp.

“I’d say a 3.5% fee is very aggressive.”

This is not the first time break fees have raised critics’ eyebrows.

Five years ago, Groupe Videotron paid Rogers Communications Inc. $241-million after the Toronto company’s bid was topped by Quebecor Inc.

Sun Life Financial Services of Canada Inc. would have been paid $310-million if its 2002 offer for Clarica Life Insurance Co. was bested.

That fee amounted to 4.5% of the deal’s value — drawing howls from critics, including Mr. Jarislowsky.

Mr. Mackenzie at Fairvest said break fees, non-existent a decade ago, have been climbing from about 2% of a deal’s value to 3% or higher in recent years.

That is replacing hostile takeovers with friendly unions, and generating smaller takeover premiums for investors, he added.

“ Twenty years ago, there were no break fees,” he said. “You hustled to get the stock. Now with these arranged bids, there isn’t as much risk.”