NEW YORK Freeport-McMoRan Copper & Gold Inc.s share price logged a double-digit decline Wednesday after the company announced its $9-billion push into the energy business, with analysts criticizing the move as an unhappy marriage between two incompatible industries.
"I dont see any reason why these two disparate sets of assets need to be together," Daniel Rohr, an analyst at Chicago-based Morningstar Inc., told AMM. "Theres nothing complementary here."
Freeport on Wednesday announced definitive plans to acquire oil and gas producer Plains Exploration & Production Co. for $6.9 billion in cash and stock, as well as oil and gas producer McMoRan Exploration for $3.4 billion in cash, or $2.1 billion net after taking into account the copper and gold miners and Plains Explorations existing stakes in the business. Included in the deal are Plain Explorations oil and gas assets in the Gulf of Mexico, onshore production at Eagle Ford in Texas and Haynesville, La.; and oil production facilities in California (amm.com, Dec. 5).
Market analysts and investors hammered the merger on a conference call Wednesday, questioning the wisdom of Phoenix-based Freeports diversification and challenging the company for making the decision without adequate shareholder input.
"I havent heard anything on this call that justified why these companies should be put together," Evy Hambro, managing director of BlackRock Inc., said during the conference call. "Congratulations on making one of the worst teleconferences Ive ever heard to justify a deal."
Investors and analysts also had sharp words for the companys alleged lack of disclosure to shareholders.
"Investors obviously have the freedom to diversify by commodity or geography, and (they) dont need management teams to do it for them," Hambro said.
Freeports share price reflected the concern, with shares trading at $38.28 apiece the evening before the deal was announced, or 19 percent above Wednesdays $32.16 per share close. Particularly concerning was that the decision was announced without giving shareholders an opportunity to vote, Rohr told AMM.
"(Investors) woke up yesterday morning and they found out that they owned a pretty pricey chunk of two big oil and gas producers," he said.
Analysts and investors said they were skeptical that the two industries were relevant to each other, especially since company executives didnt claim that natural gas and oil production would directly assist in copper output in the way that Nucor Corp. said its recent push into natural gas would directly reduce its costs (amm.com, Nov. 6).
"This deal is not one thats driven (by) or has significant impact from any cost-reduction aspects to it," Freeport president Richard Adkerson conceded during Wednesdays conference call. "Its not one thats driven by cost synergies."
Company executives insisted, however, that the company wouldnt lose focus on continuing investments in global copper projects.
"Its not an A or B situation. If we could find ways to grow in copper, wed be doing it," Adkerson said. "You know me well enough to know theres no bigger positive person about the copper markets in the world. And Im staying with that. ... If there had been copper opportunities available to us, we would have taken advantage of it."
Leon Cooperman, chief executive officer of investment firm Omega Advisors Inc., also defended the deal. "Coupled with the diversification of the companys exposure, ... (it) sounds to me like a good play," he said during the call.
Three-fourths of the combined companys earnings would still come from copper output, Freeport said, with 12 percent of combined earnings of $12 billion before interest, taxes, depreciation and amortization (Ebitda) generated from oil and gas in 2013 and 48 percent from U.S. operations, including metal and energy.
"If its successful, (the deal) could bring tremendous amounts of gas to the market at exactly the right period of time," Adkerson said.