The recent drop in commodities and commodity-related stocks has spurred doubt that Freeport-McMoRan (FCX) can successfully close the acquisition of McMoRan Exploration (MMR) and Plains Exploration & Production (PXP). In this article, I would explain why I think that these deals are out of danger.
FCX and MMR have recently announced that MMR will hold a special meeting of its stockholders on June, 3. The shareholders will gather to approve the acquisition. MMR stockholders will receive $14.75 per share should the deal be approved. MMR has recently closed at $16.51, 11.9% higher than the deal price. The stock was trading below $9 before the deal was announced.
Would MMR stockholders try to block the deal? I believe they have little reason to do this. MMR is projected to lose money both in 2013 and in 2014 (analyst estimates sourced from Yahoo! Finance). The price of the acquisition represents a hefty premium to the price at which the stock was trading before the announcement. MMR has a low current ratio of 0.65, which means that the company has significant bankruptcy risks.
PXP is a company that is in a much better shape than MMR. The company has recently reported earnings that have beaten the estimates by 28%. PXP shareholders would get 0.6531 shares of FCX and $25 in cash should the deal be approved. When the deal was prepared, this meant that PXP shareholders would get $50 per share. After the deal was announced, the price of FCX has dropped. At current prices, PXP shareholders would get $46.26 in cash and FCX stock. PXP shares have recently closed at $45.04.
PXP has announced that it continues to support the deal. Delaware Chancery Court Judge John Noble concluded that suitors did not produce enough evidence that the company directors mispriced the acquisition. It means that the shareholder vote will take place as planned. FCX has commented that the proposed terms are "best and final." The vote will take place on May, 20.
The proxy advisory firm Glass Lewis & Co has recommended that its clients vote against the acquisition of PXP. The firm has stated that the deal offers "little to no current premium" for PXP shareholders. Would the majority of PXP shareholders follow this advice? I don't think so. Before the deal came public, PXP shares were trading at $36. Now, they are trading 25% higher. There is little secret that when a deal is dropped, the stock that was going to be acquired drops. This does not mean that it would suffer in the long term, but short-term weakness is almost guaranteed. PXP shareholders would be getting FCX shares which, I believe, have significant upside potential. Copper prices have rebounded 11% from their recent lows. Gold prices have been stabilizing, too. PXP is trading at 14.54 P/E and 15.06 forward P/E. In my view, this is a good balance for both FCX and PXP shareholders.
What do these deals present to FCX shareholders? Although the stock has been down ever since the announcement of the deal, I think that such diversification would pay off in the long term. PXP is a good buy at current prices. MMR is a more dubious move, but it could pay off when all pieces of the puzzle fit together.