Xstrata launches £8bn Falconbridge bid

The Anglo-Swiss miner Xstrata has mounted a hostile bid for the Canadian nickel miner Falconbridge, offering C$16.1bn (£8bn) in cash for the 80 per cent of the company it does not already own. The deal would create the world's fifth-largest mining company and bolster Xstrata's metal portfolio.

Xstrata's bid was widely anticipated by the financial markets. Falconbridge has agreed to a merger with the Canadian miner Inco but Xstrata's hostile bid of C$52.50 a share values Falconbridge at C$20bn, which trumps Inco's agreed bid for its local rival.

Earlier this week, Inco raised its bid for Falconbridge to C$19.6bn and also upped the break fee if the deal does not proceed to C$450m.

Xstrata paid Brookfield Asset Management C$28 a share for a 20 per cent stake in Falconbridge in 2005. Xstrata agreed that if it bought out the rest of the company at a higher price, it would pay Brookfield the difference. That agreement lapsed earlier this week, paving the way for a bid.

Xstrata has grown rapidly since Mick Davis took over as chief executive four years ago. Mr Davis, 46, has turned the company from a Swiss mid-cap stock into a global mining giant that competes against the likes of Rio Tinto, BHP Billiton and Anglo American. After losing out on the Australian company WMC last year, Xstrata has been waiting to pounce on Falconbridge. Xstrata has little to lose - if it is outbid, it will make a larger profit on its stake.

The deal exposes Xstrata to nickel production as the Anglo-Swiss company predominantly mines copper and coal. Xstrata said the merger would be substantially earnings enhancing and cash flow accretive in the first year after acquisition.

Xstrata is also placing up to 62 million shares to pay back debt it raised to fund its purchase of the Falconbridge stake and a coal operation in Colombia.

Xstrata could still face competition from Inco, which received a hostile bid of C$17.8bn from the Vancouver-based Teck Cominco last week. Teck's bid stipulates that Inco drop its takeover offer for Falconbridge. Subsequently, Inco raised its bid for Falconbridge.

Falconbridge supports Inco's offer, describing it as the "right deal with the right company". However, the merger has already been delayed three times as Inco has struggled to gain regulatory approval for a merger that would create the largest nickel producer in the world.

Inco may also struggle to match Xstrata's higher price. John Meyer, an analyst at Numis Securities, said: "We believe that Inco will be unable to counter the bid." He added that it would also be difficult for another party to enter the bidding war given Xstrata's large stake. Xstrata can also justify a higher bid as it can reduce the effective tax rate on Falconbridge's cash flows because it is based in Switzerland, Mr Meyer said.