@K#hss
KEL345
DAVID STOWELL
Freeport-McMoRan:
Financingan Acquisition
A November 19, 2006, press release announcedFreeport-McMoRanCopper & Gold's
(NYSE: FCX) acquisitionof PhelpsDodge,creatingthe world's largestpublicly tradedcopper
company.FCX chief executiveofficer Richard Adkerson said, "This acquisitionis financially
compellingfor FCX shareholders,
who will benefit from significantcashflow accretion,lower
cost of capital,and improvedgeographicand assetdiversification.The new FCX will continueto
invest in future growth opportunitieswith high rates of return and will aggressivelyseek to
reducedebt incurred in the acquisitionusing the substantialfree cashflow generatedfrom the
combined business."rThe press releasewent on to note that "FCX has received financing
commitmentsfrom JPMorganand Merrill Lynch." This was the culminationof weeksof work
"inside the wall" at the two investmentbanks.However,the public announcement
was only the
beginning of a new streamof work that would take place "outside the wall" in the salesand
tradingdivisionsat thesefirms.
MetalsHeatingUp
At the time of the announcedmerger,FCX describeditself as a companythat 'oexploresfor,
develops,mines, and processesore containingcopper,gold, and silver in Indonesia,and smelts
in Spainand Indonesia."2
PhelpsDodgewas describedas"one of
andrefinescopperconcentrates
the world's leading producersof copper and molybdenum and is the largest producer of
molybdenum-basedchemicals and continuous-castcopper rod."3 The merger of these two
companiestook placeafter an unprecedented
run in the valueofcopper, basedin part on the rapid
growth in demandfrom China (seeExhibit 1), resulting in the world's largestpublicly traded
coppefcompany.
Thesetwo mergercandidatescametogetheronly after a tumultuousseriesof eventsin the
mergersand acquisitions(M&A) landscapewithin the mining industry.Just months earlier, in
June2006,PhelpsDodgeannounceda three-waymergerbetweenitself andtwo Canadianmining
companies,Inco and Falconbridge,for $56 billion.o At the time, this would have createdthe
'
FCX company press release,November 19,2006.
2Ibid.
t
a
Ibid.
Phelps Dodge company press release, June 26,2006.
@2007 by the Kellogg School of Management,Northwestem University. This case was preparedby Peter Rossmann'08 and
ProfessorDavid Stowell. Casesare developedsolely as the basisfor classdiscussion.Casesarenot intendedto serveas endorsements,
sourcesof primary data, or illustrationsof effective or ineffectivemanagement.To order copiesor requestpermissionto reproduce
materials,call 800-545-7685(or 617-783-7600outsidethe United Statesor Canada)or e-mail custserv@hbsp.harvard.edu.
No part of
this publicationmay be reproduced,storedin a retrieval system,usedin a spreadsheet,
or transmittedin any form or by any meanselectronic,mechanical,photocopying,recording,or otherwise-without the permissionofthe Ke'lloggSchoolof Management.
KEL345
FREEPORT-MCMORAN
world's largest nickel producer and largest publicly traded copper producer. J. Steven Whisler,
CEO of Phelps Dodge, made the following proclamation at the time of the announcedmerger:
This transactionrepresentsa unihqueopportunityin a rapidly consolidatingindustryto
createa global leaderbasedin North America-home of the world's deepestand most
liquid capital markets.Thecombinedcompanyhas one of the industrlt'smostexciting
portfolios ofdevelopment
projects,and thescaleand management
expertiseto pursue
their development
successfully.Thecreationofthis new companygivesus thescaleand
diversificationto managecyclicality,stabilizeearnings,and inuease shareholder
rehrns. At thesametime,we are committedto maintainingan investment-grade
credit
rating throughoutthe businesscycle.s
The Phelps Dodge announcement came months into Falconbridge's implementation of a
'opoison pill" defense in an ongoing attempt to protect itself from a takeover by Swiss mining
giant Xstrata, which had accumulated more than2} percent of Falconbridge's stock.o
Eventually, the attempted combination between Phelps Dodge, Inco, and Falconbridge fell
apart after Xstrata upped its bid for Falconbridge"Tcausing Falconbridge's board of directors to
accept this higher bid and reject Phelps Dodge and Inco.8
As the events with Xstrata unfolded, Companhia Vale do Rio Doce (CVRD), a Brazilian
mining company, made an unsolicited all-cash offer for Inco of C$86 per share; Phelps Dodge, on
the other hand, had made a partial-equity bid of C$86.89. In spite of the lower price, analysts
prophetically suggested that investors would favor the all-cash bid of CVRD at the time.e By
early September Phelps Dodge and Inco had decided to go their separateways, and CVRD soon
claimed victory in acquiring Inco.'o Having been left at the altar now twice, analysts predicted
that Phelps Dodge "could soon find itself hansformed from a bidder to a target in the deal-making
that has engulfed the global mining industry."rr
Whisler attempted to reassure his investor base when his company announced that it was
terminating its combination agreementwith Inco:
Weare very conJidentabout theprospectsof PhelpsDodge.Themarketfundamentalsfor
copperand molybdenumare excellent,and at cutent prices we are generating
signi/icantamountsofcash. Throughoutthepast severalmonths,management
and the
board havefocusedon ourfundamentalresponsibilitiesto build long-termvaluefor all
our shareholderswhile managingour balancesheetprudentlyand maintaining
investment-grade
uedit in this cyclical industry.Whilewe regret theproposedthree-way
combinationcould not be completedon acceptableterms,thefuture of PhelpsDodge
remainsvery bright.12
s Ibid.
6 "FalconbridgeProtectsAgainst 'CreepingTakeover' Xstmt4"
by
Metat Bulletin, September23, 2005.
T"Falconbridge
Gets$52.5O-Per-Share
Offer fiom X strala,"Stoclwatch, May 17, 2006.
8 "FalconbridgeYields to Xstrata,"
SteelBusinessBriefing, August1l, 2006.
e "In the Battle to Control Inco, CVRD Looks Readyto Rumble,"lnerrcan Metql Market,August 11, 2006.
r0"PhelpsLeavesCVRD as SoleBidder for Inco," Financial ?"rnes,
September6, 2006,
rrlbid.
t2PhelpsDodge companypressrelease,September5,2006
KELLOGG SCHooL oF MANAGEMENT
Fnnrronr-McMoRAN
KEL345
EnterFreeport-McMoRan
On November 19, 2006, FCX and Phelps Dodge signed a definitive merger agreement in
which the acquirer, FCX, would purchase the larger Phelps Dodge for $25.9 billion in cash and
stock. The joint press releaseannounced the following transaction details:
FCX will acquireall of the outstandingcommonsharesof PhelpsDodgefor a
combinationof cashand commonsharesof FCXfor a total considerationof $126.46per
PhelpsDodgeshare,basedon the closingprice ofFCX stockon November17,2006.
EachPhelpsDodgeshareholderwould receive$88.00per sharein cashplus 0.67
commonsharesof FCX. Thisrepresentsa premium of 33percentto PhelpsDodge's
closingprice on November17, 2006,and 29 percentto its one-monthaverageprice at
that date.
Thecashportion of $ I 8 billion representsapproximately70percentof the total
consideration.In addition,FCX would delivera total of 137million sharesto Phelps
Dodgeshareholders,resultingin PhelpsDodgeshareholdersowningapproximately38
percentof the combinedcompatryon afully dilutedbasis.
Theboardsof directorsof FCX and PhelpsDodgehaveeachunanimouslyapprovedthe
that their shareholdersapprovethe
termsofthe agreementand haverecommended
transaction.Thetransactionis subjectto the approvctlof theshareholdersof FCX and
PhelpsDodge,receipt ofregulatory approvalsand customaryclosingconditions.The
transactionis expectedto closeat the end ofthefirst quarter of2007.
FCX hasreceivedJinancingcommitments
from JPMorganand Merrill Lynch tofund the
transaction.
After giving effectto the transaction,estimated
to
complete
the
required
cash
proforma total debtat December31,2006,wouldbe approximately
$17.6billion, or
approximately$ I5 bitlion net of cash.13
The initial reaction to the merger announcement among Wall Street analysts was mixed (see
Exhibit 2 and Exhibit 3 for stock price performance):
In our view this transactionmakessensefor both companies. . . Freeportis basicallya
singlemine company,with its only significantassetlocatedin Indonesia(assethasa long
life, but limitedgrowth opportunities).PhelpsDodgehasa geographicallydiverse
operatingbaseand also hasa growthprofile, targetingincreasedoutputof 20 percentby
2009 but a relativelyshort reservelife. Hencefor Freeport,this dealspreadsthe
company'soperatingrisk and givesthe companya growthprofile. In our view this deal
also highlightsthe scarcityofcopper reservesglobally, with onelargeproducer
acquiringanother,insteadof building large-scalecoppermines.ta
Thereare severalpositivessurroundingthis transaction:(I) an improvedcostposition
(vs.PD standalone);(2) long reservelife; (3) ctmorediversifiedgeographicfootprint;
13FCX companypressrelease,November19, 2006
rr Credit SuisseEquity Research,November20, 2006.
KELLoGG SCHooL OF MANAGEMENT
KEL345
F'REEPORT-McMoRAN
(4) an attractivegrowthproJile; and (5) enhancedmanagement
depth.I(e do not seeany
anti-trustissuessuwoundingthis transaction.For PD shareholdersspecifically-the 33
percentpremium to Friday's closeand departureof CEO StevenWhislerfromthe
combinedentity is the antidotewe believetheywerelookingfor-post thefailed threeway mergerattemptfor two nickelproducersearlier in theyear. For FCX-we are
surprised-we believedFCXwas more of a seller thana buyerof assets.ts
Iile assign a onelhird likelihood that Freeport acquires Phelps Dodge as announced.
Two-thirds likelihood that Freeport collects the $750 million breakupfee. The deal
oppears very accretive to FCX and likely to attract higher bidder.l6
As the companiesinitially projectedin their joint pressrelease,the shareholders
ultimately
terms.l7Of course,one of the
approvedthe mergeron March 14,2007,underthe announced
worst kept secretson Wall Streetwas that the smallerFCX still had a tremendousamountof
work to do in financing the acquisitionof PhelpsDodge. FCX announcedon March 15 the
pricing of a total of $17.5billion in debtfinancingfor the PhelpsDodgeacquisition,including$6
billion in seniorfixed ratenotesand $10 billion in seniorfloatingratenotes.In addition,a $1.5
billion senior securedrevolving credit facility was provided, which was to be undrawn at
closing.rsJPMorganand Merrill Lynch jointly underwrotethe note offeringsand led the credit
facility. Finally, on March 19, in conjunctionwith the closing of the PhelpsDodge acquisition,
FCX announceda public offering of commonstock and convertiblepreferredstock.The initial
pressreleaseindicatedan offering of "approximately35 million sharesof commonstock" and l0
Total proceeds
million sharesof mandatoryconvertiblepreferredstockat $100.00per share.re
from thesetwo equity-relatedtransactionswere expectedto be approximately$5 billion. The
marketreceivedthesefinancingspositively,markingup FCX nearly3 percenton a day when the
S&P 500 increasedjust over I percent. At least one Wall Street analyst portrayed the
announcement
asan expectedpositive:
Management clearly communicated its intention to do an equity transaction. Likewise,
the size of the transaction is consistent with our expectcttions.While diluting existing
shareholders is not a positive, we believe this equity deal is a prudent transaction in
terms of reducing some of the/inancial risk. We estimate the combination of the equity
transaction andfree cashflow at current copper prices has the potential to reduce FCX's
debt burden by S5 billion, or 3l percent ofthe S16 billion in debt taken onfrom this
transaction, with the magnitude of debt reduction to translate into higher multiples over
time.2o
FCX's two equity-relatedtransactions(commonstock and mandatoryconvertiblepreferred)
were led by JPMorganand Merrill Lynch asjoint book-runners.The two firms equally shared
feesand leaguetable credit for thesetransactions.Eachquarter,leaguetablesrankingthe major
investmentbanks by underwritingproceedsfrom various categories(debt, equity, convertible
15Bear SteamsEquity Research,November20, 2006
16PrudentialEquity Research,November21, 2006.
r7FCX pressrelease,
March 14,2007.
18FCX pressrelease,
March 15,2007.
reFCX pressrelease,
March 19,2007.
20Credit SuisseEquity Research,March I 9, 2007.
KELLocc ScHooL oF MANAGEMENT
KEL345
Fnnrponr-McMoRAN
bonds,etc.) are released.At the end of the first quarterof 2007(1Q07),JPMorganrankedfirst in
U.S. convertibles,with a 23.9 percentmarket share and nearly $6 billion in proceedsfrom
convertibleissuance.Menill Lynch rankedthird in U.S. convertiblesat the end of 1Q07 with
nearly $4 billion, a 15.8 percent market share. For cofllmon stock underwriting at 1Q07,
JPMorganwas first at just over $5.1 billion in underwritingproceeds,with a 16.2percentmarket
share;Merrill Lynch wassecondat over $4.3billion, with a 13.7percentmarketshare.2l
Role of the InvestmentBanks
Throughoutthe flurry of activity centeredaroundFCX, from merger advisoryto debt and
equity underwriting,therewas a consistenttheme:JPMorganand Merrill Lynch were involvedat
nearlyeverystepof the way. Typically, whena companyneedsadvisoryor financialassistance,
it
holds a "bake-off' betweeninvestmentbanks,wherefirms areinvited to presenttheir credentials,
preliminaryvaluation,and view of investordemand.Companieswill choosean investmentbank
(or banks)for a variety of reasons,but over time, they usually focuson existingrelationships,in
additionto factorssuchas executioncapability,independentresearchfunction,and leaguetable
rankings.In the caseof FCX, it had well-established
ties to both JPMorganand Merrill Lynch,
and placedits trust in them for both M&A advisoryandunderwritingresponsibilities.
Investment banks typically talk about two sides of a "Chinese wall" of information.
Coverage,M&A, and capital markets teams within the investment banking function are
responsiblefor all of the due diligenceand valuationwork. As a result,they are consideredto be
insidersworking on the "private side" of the wall (or inside the wall) becauseof the sensitive
informationthat they receive.Generally,an investmentbank's salesand tradinggroup sits on the
"public side" of this wall, working with investorsand havingaccessonly to informationthat has
beenmadepublicly available.Whena companyissuesa pressreleasedescribinga mergerand/or
financingit is generallythe first time that an individualin salesandtradingwill hearof it.
Inside the Wall
Prior to the public announcements
of the transactionssurroundingthe merger,the investment
banking coverageteamsat JPMorganand Merrill Lynch were actively coordinatingthe entire
process,from the acquisitionto all aspectsof the capitalraising.The metalsand mining industry
coverageteam at each bank was primarily responsiblefor knowing FCX's generalneedsand
priorities. From there, each bank's M&A group was responsiblefor advisingthe companyon
mergervaluation,mix of cashand stock,timing, and likely shareholderreaction.The leveraged
financegroup at eachbank was responsiblefor the analysisbehindmakingthe bridge frnancing
commitmenton behalfof the investmentbankto the company.This was particularlyimportantto
enableFCX to show committedfinancingto PhelpsDodge.The equity capitalmarketsgroupsat
JPMorganand Menill Lynch were responsiblefor all aspectsof the equity offering: advisingthe
company regarding the optimal structure, size, pricing and timing of the financing (the
"origination" function), as well as working with colleaguesin their firm's institutional equity
salesareato determinepotentialinvestorinterest(the"placemenf'function).
2r ThomsonEquity Capital MarketsReview,First
KELLOGG SCHOoL oF MANAGEMENT
Quarter2007
FREDPORT-McMoRAN
KEL345
The investmentbanksand FCX neededto determinea permanentfinancingstructurebased
on expectedcredit ratings.Essentially,FCX's managementfirst had to decideon the optimal
capital structure and acceptableequity dilution levels before selecting the best financing
alternatives.Ratingsadvisoryprofessionalswho were part of the debt capital marketsgroup at
JPMorganadvisedthe companyon the credit ratingsprocessand the expectedratingsoutcomes
based on the selectedcapital structure.All of the information about financing terms and
conditions,aswell aspricing, wasfed backto eachbank'sM&A team,which assessed
the impact
to eamingsper share(EPS),expectedvaluation,andlikely investorreaction.
There are severalforms of risk that investmentbanksmust considerwhen advisingclients
and executingtransactions.Capital rlsk is the financialrisk associatedwith a bank's financing
commitmentin relationto an acquisition.If the bank commitsto providinga loan, it undertakes
considerablerisk. Large banksmitigatethis risk by syndicatingup to 90 percentof theseloansto
a wider group of banksand money managers.However,banksare forcedto keep the debt that
they are unableto syndicateto others.During the first half of 2007,bankshad committedmore
than $350 billion in loan commitmentsto facilitateacquisitionsof companiesby private equity
firms. Becauseof severedislocationin the mortgage-backed
securitiesmarket starting in mid2007, theseloans becamevery difficult to syndicate,leaving huge unanticipatedrisk positions
that resultedin billions of dollars in reportedlosses(see Exhibit 4). Reputotionrisk is less
tangible, but no less important. This is the risk that comes from associatingthe investment
bankingfirm with the companyfor which it is raising capital.Seriousproblemsexperiencedby
the companymay havea residualeffecton the investmentbank'sreputation.
Outsidethe Wall
Freeportannouncedits acquisitionof PhelpsDodge in a formal pressreleasethat "hit the
tape"(publishedon thenewswire services)on November19,2006.
After the PhelpsDodgeacquisitionhad beensigned,the investmentbanks'focussoonshifted
to syndicating out the bridge loan in order to raise the capital necessaryto complete the
transaction.Included in this processwas negotiatingwith credit rating agenciesto securethe
highestpossibleratingson the upcomingbond offerings.On February28, 2007,S&P upgraded
its debt rating on FCX's existing2014 seniordebtfrom B+ to BB+. It followedthis with another
upgradeto BBB- on April 4. Justtwo monthsafter this, on June7, it upgradedFCX's debtrating
onceagainto BBB. Similarly,Moody's had placedthe companyon positivewatchon November
20, 2006.It followed this up with an upgradefrom B 1 to Ba2 on February26, 2007,and then to
Baa3 on March 27. The credit upgradesresultedfrom both the more-than-$5billion in equity
capital raisedthroughthe commonstock and convertibleoffering and the significantincreasein
cashflow that resultedfrom the merger(seeExhibit 5).22
After the completionof all debt-relatedtransactions,FCX and PhelpsDodge finalized the
acquisition.Once this was complete,it openedthe door to the equity and equityJinkedcapital
raising.
--
IJlOOmDerg.
KELLoGGScHooL oF MANAGEMENT
KEL345
F,REI,PORT-MCMoRAN
Placing the Equity and Convertible Offerings
Institutional salespeopleat investment banks are responsiblefor bringing investment
opportunitiesto the analystsand portfolio managersof large assetmanagerssuch as mutual
funds,hedgefunds,pensionfunds,and someinsurancecompanies.Their investmentideascome
from a variety of sources,including researchdone by the firm's equity researchanalysts.The
institutionalassetmanagersdo not pay investmentbanksfor their investmentideas;rather,they
pay commissionson the largetradesthat they execute.This processis part art andpart science.
Traditionally, institutionalmanagersconducta periodic vote to rank eachinvestmentbank and
attemptto allocatecommissionsfor the next periodaccordingly.
Shortly after FCX's intentionto issueequity and convertiblesecuritieswas announced,the
JPMorganinstitutionalsalesforce hearda "teach-in" by the frrm's metalsand mining industry
analyst.Becauseof JPMorgan'sinvolvementas advisor to Freeporton the acquisition,their
equity researchanalystwas restrictedfrom providing an investmentopinion on sharesof FCX.
However,he was allowed to provide the institutionalsalesforce an overview of the equity and
had.
convertibleofferingsandtheir uses,as well as answerany relatedquestionsthat salespeople
team
After this presentation,
the salesforce had the opportunityto hearfrom FCX's management
regardingboth the rationalefor the PhelpsDodgeacquisitionas well as the methodof frnancing
chosen.Altogether,this sessionprovidedthe salesteam with enoughinformationto be able to
discussthe offeringsin detailwith their institutionalassetmanagerclients.
The managementteam at FCX also participatedin an investor "roadshow": a series of
meetingswith institutional investorsto discussthe company'scurrent frnancial position and
businessactivities.For IPOs,roadshowstypically last one or two weeks,providingthe company
a forum to tell its story to new investors.For secondaryofferings(follow-on capitalraisingsfrom
an existing public company)and convertibles,roadshowsare consideredoptional,dependingon
how well the companyis known. In this case,FCX had done a'onon-deal"roadshowafter the
educatinginvestorson the transaction,and so only a limited roadshow
acquisitionannouncement,
was scheduledfor the equityandconvertiblefinancings.
The combinedequity and convertibleroadshowbeganon Tuesday,March 20, one day after
from both JPMorgan
regardingclosing of the acquisition.Salespeople
the public announcement
andMerrill Lynch lined up a seriesof meetingsin multiple citiesover a three-dayperiodandthen
joined a member of the investmentbanking team and several members of the company's
managementteam on the roadshow.Becauseof the high demandfor meetingsand the limited
time frame, salesforce managementhad to work with the capital marketssyndicateteam to
decidewhich investorsto see.The decisionto meet with investorsdependedon severalfactors,
suchas the size of the investor,quality of relationshipwith the company,and level of previous
interestin it. Currentshareownershipwas alsoan importantconsideration.
During this time, salespeoplehad a seriesof conversationswith their institutional investor
clients about the stock and convertible issuesand provided feedbackto the capital markets
syndicateteam,who kept track of investorconcernsand overall sentimentaboutthe issue.The
syndicateteam communicatedany recurringissuesthat cameup during the feedbackprocessto
companymanagement.This feedbackloop was particularly important for the price discovery
process,as the syndicateteamwas responsiblefor establishinga price for the offering. The price
discoveryprocessis relativelytransparentbecausethe stockis alreadytradedin the openmarket.
However,the key questionthat remainsis how much of a discount(if any) will be appliedto the
"last sale,"or closingprice of the stockon the day of pricing. Someinvestorsput in limit orders,
KELLOGGSCHooL oF MANAGEMENT
F.REEPoRT-MCMoRAN
KEL345
which dictate the highest price they would be willing to pay, while others are content with market
orders, which indicate a willingness to pay the market-clearing price for the offering. This affects
the final pricing decision because investment banks, as well as companies, are reluctant to shut
out large and important investors who have submitted limit orders, even though market orders are
always preferable.
For the convertible offering, price discovery focuses on the coupon and conversion premium
relative to the underlying common stock. Similar to the common stock transaction, the equity
capital markets syndicate maintains a book of investor demand and makes a pricing
recommendation to the company that is designed to allow the security to trade up modestly.
Demand for the convertible comprises approximately half convertible arbitrage hedge funds and
half traditional mutual funds or dedicated convertible funds. In smaller transactions and for
convertibles that do not have a mandatory conversion feature, allocations tend to be skewed
toward convertible arbitrage funds. Convertible arbitrage funds attempt to purchase the
convertible instrument while short-selling shares of the common stock in a manner to take
advantage of inherent arbitrage opportunities. While companies might have concems about a
large pool of investors shorting their common stock, convertible arbitrage funds provide several
advantages: (1) the incremental demand from convertible arbitrage funds allows companies to
achieve better pricing in their convertible offerings (cheaper financing); and (2) the demand also
ensures more trading liquidity in the convertible security, adding to the attractiveness for
traditional long-only investors.
MandatoryConvertiblePreferredShares
FCX's convertibleinstrumentwasdesignedto be convertedmandatorilyinto a predetermined
number of the company'scommonsharesin three years.As a result, rating agenciesassigned
"equity content"of up to 90 percentto this convertibletransaction(seeExhibit 6 and Exhibit 7).
For a more traditional optionally convertingconvertible,rating agenciesusually athibute no
equity contentand,in fact, assumethe convertibleis more like a bond unlessand until it converts
in the future into commonshares(which will happenonly if the investordeterminesthat the value
of the commonsharesthe convertiblecan convertinto exceedsthe cashredemptionvalue of the
original security).The use of a mandatoryconvertiblestructureby FCX facilitatedthe rapid
credit rating upgradespreviouslydiscussed.The issuanceof commonstock in conjunctionwith
the convertibleenabledconvertiblearbitragehedgefund investorsto moreeasilyborrow andthen
short sell FCX common shares,which facilitated strongerdemandfor and resultedin better
pricingof the convertible.
FCXPost-Allocation
Sharesof FCX closedon Thursday,March22,2007,at $61.91.On March23,Ihe company
priced47.15million sharesof stockat $61.25per share(proceeds
of approximately
$2.9billion),
along with 28.75million sharesof 63/npercentmandatoryconvertibleprefenedstock at $100.00
per share(proceedsof approximately$2.9 billion). Net proceedsto FCX, after underwriting
discountand expenses,totaled $5.6 billion.'3 By the end of trading on March 23, FCX shares
2r FCX pressrelease,
March28,2007
KELLoGG ScHooL oF MANAGEMENT
KEL345
Fnnnronr-McM0RAN
closedup 39 centsfrom the prior closeto $62.30,a nearly 2 percentgain from the transaction
price (seeExhibit 8). By most accounts,this was a successfuloffering for both the companyand
investors.FCX was interestedin the quality of the investorbase.Generally,if a companyhasan
opportunityto allocatenewly issuedsharesto investorsit believeswill be long-termholders,it is
willing to makesomeconcessionon price,which wasthe casewith the FCX offering.
The convertibleendedthe trading day at 101.5,having beenofferedto investorsat 100 (the
"par" price). As was the casewith the equity offering, FCX had an interest in making surethat it
did not leavesignificantmoney on the table for the convertibletransaction.At the sametime, it
wanted to ensure that both offerings----commonshares and convertible-were placed with
appropriateinvestorswho werewilling to take long-termpositions(seeExhibit 9 and Exhibit 10
price action).
for post-transaction
NORTHWESTERN
UNIVERSITY
KELLoGG SCHOOL OF MANAGEMENT
KEL345
FREEPORT-MCMORAN
Exhibit1: CopperSpotPricevs. FCXStock,September,2}0l-December,
2006
400
350
300
250
+CopperSpot
200
+FCX
Price
Price
150
100
50
0
5 5 ; E $ E E 3 8 S8 S 3 8 8 9 33 3 3 3 3 3 3 3 3 3 33 3 3 33 3 3 33 3 33 3 3 3 3 8 3 33 3 83 3 3 33 8 8 33 8 88 8 I
gtEp
=E#tE5$E
!$eFg€=$,ffi
s3tE5$EFg:
sg5=FsEtE
s+g:iss3'g
EEE$s
sg-Ei3a"E
prices
Source.'NYMEX
COMEXdata;FCXhistorical
Exhibit2: PhelpsDodgeStockPerformance,
January3, 2006-March
19,2007
@ U SI
Acquired
EquityGP
GP- LineChan
upp.t flffilililtr
MovAvgsfff
LrrwerffifirytrMov.Avs
m
Ranse[@-@@
-=l
Period
Page1/9
currencyiltr|
30
t0
10
00
0
0
Hustrqlrq
.Idpdn
81
3
bl
? 9///
3201
8900
rflzll
))ll
Singspore
3u4B 4300
65 621e 1000
r J .s . 1 2 1 2 3 1 8 2 0 0 0
Cop'Jright 20OZ Bloomberg Findnce L.F.
G597-5O6-0 19-Hov-?007 08,37'?9
SourcejBloomberg
t0
KELLocc ScHool or MATAGEMENT
KEL345
Fnn['Ponr-MCMoRAN
Exhibit3: FCXStockPerformance,
January3, 2006-March19,2007
-2
.67
g
N 3s N 97,ii/9i,43? 1gxl
f f i us T 9 7 -2 7
A t 8 : 4 0 V o l 7 8 7 . 9 8 60 u 9 7 . 5 T H i 9 7 . 5 N L o 9 7 . 3 3i l P r e v L 0 0 . 0 4
GP - LineChaft
liirle-'l
-----***-lMov.Avgs
Ranse@-ffiupper
-*l
Period
Jqpqn 8l
3 3201 89OO
Lnwer
Singqpore
Source;Bloomberg
KELLoGG ScHooL oF MANAGEMENT
---l
65 6212 l0OO
fff
Mov Avg lE
Page1/B
Currency
iltr|
FREDPORT-MCMoRAN
KEL345
Exhibit4: Bankson a BridgeToo Far?As RiskRisesin LBOs,lnvestorsStartto
Balk;WarningfromOverseas
B Y R O B I N S I D E L ,V A L E R I EB A U E R L E I NA N D C A R R I C KM O L L E N K A M P
The nation'slargestfinancialinstitutionshave spentthe pastyear relying on robustcapitalmarketsto offset woes
in their retail-bankingoperations.Now, that big revenuestreammay be startingto dry up.
A suddenretrenchmentin debt marketsis likely to nip at profits at the big banks that have been financing the
leveraged-buyout
boom aroundthe globe.The latestdealbonanza,in which private-equityfirms buy public companies
and load them up with debt,has createdseveralnew financingtechniquesthat mint money for the banks,but can also
leavethem holding more risk.
For J.P. Morgan Chase& Co., Citigroup Inc. and Bank of America Corp., the biggestplayersin the leveragedloan business,a slowdown in deal financingscomes as they grapple with diffrcult issues.Among them: a tric$
interest-rateenvironmentthat makesit lesslucrativeto makeloans,a slowdownin mortgageandhome-equitylending,
and fierce competitionto acquiredeposits,even as banks are still strugglingto assessthe fallout from the turmoil in
subprimehousing.
Banks won't "lose money,but what will happenis that they won't make asmuch and earningsmay decline,"said
GaneshRathnam,a bankinganalystat MorningstarInc. in Chicago.
As they haveracedto financeleveragedbuyouts,the bankshave alsosteadilytakenon more risk. Although much
ofit is typically parceledout to investors,the bankscan be left holding the bag, as happenedwhen investorsbalkedat
the U.S.Foodservice
deal.
In the U.S., so-calledcovenant-litedealsaccountedfor about26% offirst-quarter dealsversus4.602in European
leveraged-loanissues.The pacebeganto sharplyincreasein Europein March, accordingto Bank ofAmerica research.
The "covJite" deals-- where a bank'scovenantprotectionsare weakened-- havebeena result ofthe cheapfinancing,
allowing borrowers to reduce financial covenantsthat typically require bonowers to meet fmancial hurdles on a
quarterlybasis,the reportnotedearlierthis week.
In particular,regulatorsare expressingconcernabout"equity bridge loans"in which private-equityfirms asktheir
banks to provide stop-gapfinancing for some deals.The loans,which carry high interestrates,last from tfuee to 24
monthsand arerepaidoncethe saleofbelow-investment-grade,
orjunk, bondshas occurred.
So far this year, bankshaveprovided $33.38billion in bridge loansto leveraged-buyout
deals,more than double
last year's $12.87 billion, accordingto ReutersLoan Pricing/DealScan.The volume is the highest since the LBO
heyday20 yearsago,when$48.14billion in bridgeloanswasissuedin 1988.
Of the banks,Citigroup,DeutscheBank AG and J.P.Morgan have arrangedthe most bridge loans for leveragedbuyout dealsthis year.
Regulatorsexpectto take anotherlook at guidancethey issuedin 2001 on leveragedlendingto seeifit still fits. At
the time, bankskept most leveragedloans on their balancesheets,and regulatorsthus expectedthem to considerthe
borrower's ability to repay principal, not just interest. Banks now typically distribute their loans to institutional
investors,so regulatorssay they may needto considerdifferentcriteria.It may be lessimportantfor a bank to consider
the borrower'sability to amortizea loan, and more importantto weigh the "reputationalrisk" that a loan it sold to
investorsgoesbad, or "pipelinerisk" -- when adversefinancingconditionsforce it to keep a loan on its balancesheet
ratherthan distributingit.
A report this month by the Bank for InternationalSettlementssaid, "The fact that banks are now increasingly
providing bridge equity, along with bridge loans, to support the still growing number of corporatemergers and
acquisitionsis not a good sign." It went on to say: "A closelyrelatedconcernis the possibility that bankshave,either
intentionallyor inadvertently,retaineda significantdegreeofcredit risk on their books."
Source:
WallStreet
Journal,
June28,2007
12
KELLOGGScHooL oF MANAGEMENT
KEL345
FRf,EPORT-MCMORAN
Exhibit5: BondRatingsby Dateand RatingAgency
November
20, 2006
February26,2007
February28,2OO7
March27,2OO7
Aptil4,2007
June7,2OO7
RatingAgency
Moody's
Moody's
S&P
Moody's
S&P
S&P
Upgrade
Positiveoutlook
81 to Ba2
B+ to BB+
Ba2to Baa3
BB+to BBBBBB-to BBB
Source.'Bloomberg
Preferred
Exhibit6: Selections
fromSECFilingfor Convertible
Offering,3/23
T H EO F F E R I N G
Issuer
Freeport-McMoRan
Copper& Gold Inc.
Securitiesoffered
25,000,000sharesof 6sloolo
mandatoryconvertible
preferredstock(28,750,000
sharesifthe underwriters
exercisetheir overallotmentoption in full), which we
refer to in this prospectussupplementasthe "mandatory
convertibleprefenedstock."
Initial offering price
$100.00per shareofmandatoryconvertiblepreferred
stock.
Option to purchaseadditionalsharesof
mandatoryconvertiblepreferredstock
To the extentthe underwriterssell morethan
25,000,000
sharesof our mandatoryconvertible
prefenedstock,the underwritershavethe optionto
purchase
up to 3,750,000additionalsharesofour
mandatoryconvertiblepreferredstockfrom us at the
initial offering price, lessunderwritingdiscountsand
commissions,
within 30 daysfrom the dateof this
prospectus
supplement.
Dividends
per shareon the liquidationpreferencethereofof
6t/oYo
$100.00for eachshareofour mandatoryconvertible
prefemedstockper year.Dividendswill accrueand
cumulatefrom the dateof issuanceand,to the extent
that we arelegallypermittedto pay dividendsand our
boardof directors,or an authorizedcommitteeof our
boardof directors,declaresa dividendpayable,we will
pay dividendsin cashor, subjectto certainlimitations,
in commonstockon eachdividendpaymentdate.The
expecteddividendpayableon the first dividendpayment
dateis $2.30625per share,andon eachsubsequent
dividendpaymentdateis expected
to be $1.6875per
share.See"Descriptionof mandatoryconvertible
prefenedstock-Dividends."
KELLoGG SCHOOL OF MANAGEMENT
13
FRDEPORT-MCMoRAN
KEL345
Exhibit 6 (continued)
Dividend paymentdates
February1, May l, Augustl, andNovember1 of each
yearprior to the mandatoryconversiondate(asdefined
below),and on the mandatoryconversiondate,
commencingon August 1, 2007.
Redemption
Our mandatoryconvertibleprefenedstockis not
redeemable.
Mandatoryconversiondate
M a y1 , 2 0 1 0 .
Mandatoryconversion
On the mandatoryconversiondate,eachshareofour
mandatoryconvertiblepreferredstockwill
automaticallyconvertinto sharesof our commonstock,
basedon the conversionrateas describedbelow.
Holdersof mandatoryconvertiblepreferredstockon the
mandatoryconversiondatewill havethe right to receive
the dividenddueon suchdate(includingany acuued,
cumulated,andunpaiddividendson the mandatory
convertiblepreferredstockas ofthe mandatory
conversiondate),whetheror not declared(otherthan
previouslydeclareddividendson the mandatory
convertiblepreferredstockpayableto holdersof record
asof a prior date),to the extentwe arelegally permitted
to pay suchdividendsat suchtime.
Conversionrate
The conversionrate for eachshareof our mandatory
convertibleprefered stockwill not be more than 1.6327
sharesof commonstockandnot lessthan 1.3605shares
of commonstock,dependingon the applicablemarket
valueof our commonstock,asdescribed
below.
The "applicablemarketvalue" of our commonstockis
the averageofthe daily closingpriceper shareofour
commonstockon eachof the 20 consecutivetrading
daysendingon the third tradingday immediately
precedingthe mandatoryconversiondate.
The following table illustratesthe conversionrateper
shareof our mandatoryconvertiblepreferredstock
subjectto certainanti-dilutionadjustmentsdescribed
under"Descriptionof mandatoryconvertiblepreferred
"
stock-Anti-dilution adjustments.
Applicable
MarketValue
Lessthanor equalto $61.25
Between$61.25and$73.50
Rate
Conversion
1.6327
dividedby the
$100.00
applicable
marketvalue
Equalto or greaterthan$73.50
t4
I .JOUJ
KELLOGG SCHOOL OF MANAGEMENT
KEL345
FREEPORT.MCMORAN
Exhibit 5 (continued)
Optionalconversion
At any time prior to May 1, 2010,you may electto
converteachofyour sharesofour mandatory
convertiblepreferredstockat the minimum conversion
rateof 1.3605sharesof commonstockfor eachshareof
mandatoryconvertiblepreferredstock.This conversion
rateis subjectto certainadjustmentsas describedunder
"Descriptionof mandatoryconvertiblepreferredstock"
Anti-dilution adjusfinents.
Ranking
The mandatoryconvertiblepreferredstockwill rank
with respectto dividendrights andrights uponour
liquidation,winding up, or dissolution:seniorto all of
our commonstockandto all of our othercapitalstock
issuedin the futureunlessthe termsof that stock
expresslyprovidethat it ranksseniorto, or on a parity
with, the mandatoryconvertibleprefenedstock;
Useofproceeds
We intendto usethe net proceedsfrom the offeringto
repayoutstandingindebtedness
underour TrancheA
term loan facility andTrancheB term loan facility.
Listing
The mandatoryconvertibleprefenedstockhasbeen
approvedfor listing on the New York StockExchange.
KELLOGGSCHooL oF MANAGEMENT
l5
KEL345
FREBPORT-MCMORAN
Exhibit7: Convertible
Preferred
Mechanics
o
;
1.6327
> 1.3505
o
s73.s0
Applicable
MarketValue
Lessthanor equalto $61.25
Between$61.25and$73.50
Equalto or greaterthan$73.50
Rate
Conversion
1.6327
$100.00 divided by the
applicablemarket value
1.3605
As ofthe mandatoryconversiondate,for each$100 mandatoryconvertiblepreferredsharepurchasedby
investors,they will receive1.6327FCX sharesif FCX shareprice is lessthan or equalto $61.25on that
date. If FCX sharepriceis between$61.25and$73.50,investorswill receivebetween1.6527and 1.3605
FCX shares.If FCX shareprice is equalto or greaterthan $73.50,investorswill receive1.3605FCX
shares.
t6
KELLoGG
ScHoor-or MauacplanNr
KEL345
FREEPORT-MCMORAN
Exhibit8: FCXStockPrice,March16,2007-March23, 2007
F C XU S$
T 1O4 - 55 +.64N --x-EquityGP0
DELAY
08:46 Vol 4.392,748 0p 104.98N Hi 105.38P Lo 103.37N
riP0 - B;rr-,lhart
IrTide-l
P;rgeLl!
-@'upper
Rarige@@
eeri,rdlflfiil]
JqFs 81 3 sml
Agn
ffiEil
LowerillFlor,,
StngrcFora 65 6212 !{nO
htov..:';gsflf
i:.,g I5
u.s. I 2t2 3ls
nf,ru
furrencl,,
tffic
L.P,
29-{,.c-?oo7 09,29,8
Source.' Bloomberg
KELLoGG ScHooL
oF MANAGEMENT
t7
KEL345
FREEPORT-MCMORAN
Exhibit9: FCXEquity,March1,29l7-December28,2007
FCXUS$
EquityGP
1 LO4 - 55 +.64 N --x-0ELAY
08:46 Vol 4,392,7480p 104.98N Hi 105.38P Lo 103.37N
paset/6
iip-LineCtrart
mlffil
-3frHiltil Uprr*r[EElt[llill
F.arrseSffi@
.i:!.,!l-s:ff
]rlo,,r,
{urrenci' tlfl{
r.r.,gfp
Periocllffi[]l
L,rwerllElilillllor.i,
JcFEn el 3 3ml
Sgm
Sing{iotre
65 6el2
l0fll
u.s. t 212 318 2000
Caplriqht rtr* Blea{baig Finscr L.P.
8397-6D6-O 2g-Dcg-am7 09, 48, 4l
Source.' Bloomberg
KELLoGG ScHooL oF MANAGEMENT
KEL345
F'RDEPORT-MCMoRAN
Exhibit 10: FCX ConvertiblePreferred.March23,2097-December14,2OO7
pfd Gp
F C X6 3 + e o
EXCH
$
I 3-53 - OOO +.660 N --x-and Settings\plr610\Desktop\preferred.bmp
Screensavedas D:\Documents
ffiEE
iip-Lineitrart
Page l.16
-Wupp*''
IFjTI
.r.'.'s:r
Rarrge@
l"to'".
crrrrenc;r
ffiffi]
fff
peric,dllil$Jl
..r'rr IF
Lrwer [illFl,r'u.
.tqpqn 91 3 3201 S900
Singdpre
65 6212 lo00
u.s. I 212 318 2000
Copgright *rrr
Bloofrb€,rg Finsnce L.P.
8597-606-0
29-Dec-2O07 09'27' 44
Source: Bloomberg
KELLoCG ScHooL oF MANAGEMENT
l9