Phelps Dodge Backs Down On Inco Purchase
Quite a few months ago Phelps Dodge made a play for Inco in a takeover attempt. Both are very economically sensitive companies. Phelps is a primary copper producer and Inco a primary nickel producer. I'm simplifying both companies tremendously because they are both much more than what I stated but for purposes of this post, I'm trying to keep things simple. Inco has been publicly traded for at least forty years. In that time the stock has never traded at a price higher than the mid thirties. Ever. That includes the very inflationary 1970s. No splits, no price adjustments. Ever. That is, until this cycle where it has traded over $80. Double its all time high and double the price it achieved in the 1970s. This is an extremely cyclical company.
Phelps was set to pay over $17 billion for Inco, a company whose revenues were likely around $1-2 billion before the nickel & commodity price explosion. I don't have access to a Bloomberg terminal and I don't know how I would validate revenue back five years or so before we started this explosion. Maybe the SEC has some historical data or I could find it elsewhere. Today, Inco is a $5 billion revenue company with an enterprise value close to the $17 billion takeover price. Not really out of line but remember the enterprise value until this cycle likely never exceeded some fraction less than 50% of $17 billion. Book value is $6 billion. Phelps Dodge was bordering on being irresponsible in my estimation. Someone has likely come to their senses and backed away. Whatever the reasons were given in the press, I also suspect there was a little bit of reality setting in. I suspect there was a forfeiture of some monies in doing so but I simply cannot see buying a commodities producer at such astronomical valuations this late in the commodity cycle. The time to buy Inco was when it was trading at $8 in 1998 or $12 in 2001 not at $80 today.
Phelps Dodge appears to be a reasonably well run company and if I were a shareholder, I'd be mighty happy that this marriage was called off.
Phelps was set to pay over $17 billion for Inco, a company whose revenues were likely around $1-2 billion before the nickel & commodity price explosion. I don't have access to a Bloomberg terminal and I don't know how I would validate revenue back five years or so before we started this explosion. Maybe the SEC has some historical data or I could find it elsewhere. Today, Inco is a $5 billion revenue company with an enterprise value close to the $17 billion takeover price. Not really out of line but remember the enterprise value until this cycle likely never exceeded some fraction less than 50% of $17 billion. Book value is $6 billion. Phelps Dodge was bordering on being irresponsible in my estimation. Someone has likely come to their senses and backed away. Whatever the reasons were given in the press, I also suspect there was a little bit of reality setting in. I suspect there was a forfeiture of some monies in doing so but I simply cannot see buying a commodities producer at such astronomical valuations this late in the commodity cycle. The time to buy Inco was when it was trading at $8 in 1998 or $12 in 2001 not at $80 today.
Phelps Dodge appears to be a reasonably well run company and if I were a shareholder, I'd be mighty happy that this marriage was called off.
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