McMoRan Buys McMoRan

Purchase of upstream independent with a focus on the USGC, including shallow-water GoM assets.

Phoenix-based mining giant Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) plans to buy two separate independent upstream oil and gas companies for a total of $10.3 billion in cash and stock.

The first half of the dual acquisition is for Houston-based Plains Exploration & Production Co. (NYSE: PXP) for about $6.9 billion in cash and stock. In addition, Freeport McMoRan will buy New Orleans-based McMoRan Exploration Co. (NYSE: MMR) for $3.4 billion in cash, or $2.1 billion net of 36% of McMoRan that Freeport and Plains already own.

Plains shareholders will receive 0.6531 shares of Freeport McMoRan and $25 in cash for each of their common shares, a payment equal to about $50 per share based on the closing price of FreePort shares on Dec. 4. That valuation represents a premium of 39% of the closing price of Plains shares on Dec. 4. and a 42% premium of the share’s one-month average price.

Plains shareholders may elect to receive cash or stock consideration, subject to proration in the event of oversubscription, with the value of the cash and stock per-share consideration to be equalized at closing. Aggregate consideration to the Plains shareholders is expected to consist of approximately $3.4 billion in cash and approximately 91 million shares of Freeport common stock.

McMoRan Exploration shareholders will receive $14.75 in cash and 1.15 units of a royalty trust for each of their shares. The royalty trust will hold a 5% overriding royalty interest in future production from its ultra deep exploration properties. The cash consideration of $14.75 per share represents a premium of 74 % of the share’s closing price on Dec. 4 and a 31% premium to its one-month average price at that date. The cash portion of the transaction totals $2.1 billion, excluding payment for MMR interests currently held by Freeport and Plains.

Freeport management believes the addition of a high quality, U.S.-focused oil and gas resource base will provide exposure to energy markets with positive fundamentals, strong margins and cash flows, exploration leverage and financially attractive long-term investment opportunities. The combined company’s long-lived resource base with commodities critical to the world’s economies provides enhanced opportunities to benefit from long-term global economic growth. On a pro forma basis for 2013, about 74% of the combined company’s estimated EBITDA (earnings before interest taxes, depreciation and amortization), will come from mining and 26% from oil and gas. About 48% of combined EBITDA will come from U.S. operations.

Freeport said the oil and gas assets it will buy are in attractive U.S. geologic basins. The McMoRan portfolio is expected to provide a large, long-term and low cost source of natural gas production.

Freeport chairman James R. Moffett said, “This transaction will enable us to add assets with exceptional exploration and development potential to a world-class mining company to create a premier minerals and oil and gas business focused on value creation for shareholders.”

Plains chairman and chief executive James C. Flores said, “I believe that the addition of PXP’s U.S. oil and gas assets to FCX’s global mining business will establish a very significant, long-term commodities business positioned to generate meaningful returns over an extended period.”

The transactions are expected to close in the second quarter of 2013. At closing, Flores and two other members of Plains’ board will join Freeport McMoRan’s board of directors. The corporate headquarters of the combined company will be located in Phoenix, Arizona, and the combined company will also maintain offices in Houston, Texas and New Orleans, Louisiana, to support its oil and gas operations and existing administrative functions.

Freeport McMoRan has received $9.5 billion in financing commitments from JPMorgan Chase Bank, N.A. to fund the cash portion of the merger consideration for both transactions and to repay debt outstanding under Plains’ existing term loans and revolver. Freeport intends to provide a guarantee for all existing Plains bonds and Plains in turn will provide guarantees for all current and future Freeport bonds and term loans. After the transaction closes, estimated pro forma total debt at Sept. 30, is about $20.0 billion, or approximately $16.3 billion net of cash.

For the year 2013, assuming prices of $3.50 per pound for copper, $1,500 per ounce for gold, $12 per pound for molybdenum, $100 per barrel for Brent crude and $4.50 per million British thermal units (MMBtu) for natural gas and current estimates of production, the combined company’s estimated EBITDA would approximate $12 billion and operating cash flows would approximate $9 billion.

Following the transaction, Freeport McMoRan intends to use cash flows to invest in development projects and to repay debt. The company expects to continue its regular annual common dividend of $1.25 per share.
Credit Suisse Securities LLC acted as financial advisor to the special committee of the Freeport McMoRan board of directors while Wachtell, Lipton, Rosen & Katz gave it legal advice. Evercore Partners acted as financial advisor McMoRan Exploration while Weil, Gotshal & Manges LLP gave it legal advice. Plains received financial advice from Barclays and legal advise from Latham & Watkins LLP.

Freeport McMoRan is an international mining company which operates large, long-lived, geographically-diverse assets with significant proven and probable reserves of copper, gold and molybdenum. FCX mines for copper and is the world's largest producer of molybdenum. Its portfolio of assets includes the Grasberg minerals district in Indonesia, the world’s largest copper and gold mine in terms of recoverable reserves; significant mining operations in the Americas, including the large-scale Morenci minerals district in North America and the Cerro Verde and El Abra operations in South America. In addition, it has operations in the Tenke Fungurume minerals district in the Democratic Republic of Congo.

Plains is an upstream energy company with producing assets in California, Texas, Louisiana, and the Deepwater Gulf of Mexico. McMoRan Exploration Co. is an independent upstream energy company with natural gas and oil assets in in the shallow waters of the Gulf of Mexico Shelf and onshore in the Gulf Coast area.

The market gave mixed reaction to the announcement. Shares in Plains rose abruptly, around 24%, to $45.30, pushing up its market capital to about $5.8 billion. McMoRan Exploration shares surged even further, around 80%, to $15.38, pushing up its market capital to around $2.43 billion. Freeport McMoRan shareholders, however, were skeptical of the value of the transaction. Those shares slipped 14% on the morning of the announced acquisition.