Today the news broke that Freeport-McMoRan Copper & Gold Inc (FCX) has entered into a leveraged buyout agreement in which it will acquire Plains Exploration & Production Co. (PXP) for a $6.9 billion combination of cash and stock as well as McMoRan Exploration Co. (MMR) for $3.4 billion in cash. The goal of these acquisitions is to manufacture a strong synergy between FCX's existing mining exploration business and the future of PXP's and MMR's leading U.S. based oil and gas exploration in hopes to generate additional revenues and position itself as a long-term value for its shareholders.
James R. Moffett, Chairman of the Board of FCX, addressed this acquisition with the following statement:
"FCX has been built through our exploration and development capabilities, and 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. The transaction offers significant values to the MMR and PXP shareholders and will enable FCX to build on these values through a much larger, well capitalized platform. We are pleased to add the PXP and MMR oil and gas teams to FCX's global family. The combined mining and oil and gas teams have significant management depth in operations, technical innovation, project development and financial management, and share a strong commitment to safety, community development and environmental management."
Shares dropped to a low of $31.72 this morning after it was announced.
So what real value is FCX getting out of this deal and what can they bring to the table in this market segment? In short, the answer is cash and leadership experience. As of last quarter PXP's balance sheet consisted of approximately $10.5 billion in total assets offset by slightly over $7.5 billion in total liabilities. Cash is being consumed at an alarming rate along with the acquisition of more and more debt which has made this company extremely risky to prospective investors.
FCX, on the other hand, is currently very well capitalized and only stands to grow from its ongoing business. This financial stability will give it a basis to restructure the terms of PXP's existing debt while capitalizing on the growing EPS of $1.39. MMR is in a similar situation in which they hold $2.75 billion in hard assets offset by roughly $1.15 billion in liabilities. Over the last 2 years its cash position has decreased from approximately $908 million in December of 2010 to roughly $191 million as of last quarter's earnings.
Essentially the key play here for FCX is external growth by acquisition. Both of these companies contain a lot of operating inefficiencies ,so we can expect a significant amount of downsizing from the staff as they begin to incorporate what both companies have to offer. This will add approximately $.80 to $1 per year to their existing EPS. and given its current P.E. multiple of 10.76 it will eventually drive the share price back to $42. The real question now is in what timeframe investors can expect to see the returns.
Given China's recent growth figures and the increasing demand for copper, oil, and gas, I believe it will be around the end of 2013. Therefore, I still maintain my position that FCX is a strong investment given its past performance and current dividend. At this point all I can do is add to my position and wait for the results.
Disclosure: I am long FCX.