Inco Drops Bid for Falconbridge, Marking Victory for Xstrata in Mining Takeover Battle

Canadian nickel miner Inco Ltd. said Friday it is dropping out of the bidding war for rival Falconbridge Ltd., opening the door for Anglo-Swiss mining company Xstrata PLC to move ahead with its hostile takeover of Falconbridge.

Inco said its $17.3 billion bid for Falconbridge failed because not enough shares were tendered by midnight Thursday, and it has instructed depositary CIBC Mellon Trust Co. to return all shares that were tendered. The company didn't say how many shares were tendered, but the minimum tender condition for its stock-and-cash bid was 50.01 percent.

"Though a large number of Falconbridge shareholders supported our offer, unfortunately it wasn't enough," said Scott Hand, chairman and CEO of Inco. "This is disappointing news for the many people at Inco and Falconbridge who have worked very hard to realize this transaction and create what we believe would have been a truly great mining company. But the Falconbridge shareholders have spoken, and we're moving on."

Falconbridge said its board will meet to review the latest developments and Investment Canada's approval of the takeover by Xstrata. The company said it would later provide its shareholders with a formal recommendation.

Inco's shares rose $2.50, or 3.4 percent, to close at $76.40 on the New York Stock Exchange. Falconbridge shares rose 36 cents to finish at $55.02.

The termination of the deal came a day after Xstrata stepped up its efforts to acquire Falconbridge.

On Thursday, Xstrata, which already owns about 20 percent of Falconbridge, said it planned to buy up to another 5 percent of the company's shares. Last week, Xstrata raised its hostile bid to acquire the remaining 80 percent of Falconbridge to $16.9 billion in cash and its offer now values all of Falconbridge at $21.24 billion.

Xstrata welcomed the news that Falconbridge shareholders had rejected the Inco offer and urged that they tender their shares to Xstrata's all-cash offer by Aug 14.

"The success of Xstrata's offer is the best outcome for Falconbridge stakeholders, including, in particular, shareholders and employees," said Xstrata Chief Executive Mick Davis in a statement.

Inco said it is now turning its attention to completing its takeover by Phoenix-based copper miner Phelps Dodge Inc. to create "a global powerhouse in nickel and copper."

The company said the offer from Phelps is "clearly superior to the competing bid for Inco put forward by Teck Cominco." Vancouver-based Teck Cominco Ltd. has also launched a hostile takeover attempt for Inco.

Phelps Dodge Inco would be the world's second-largest nickel producer, one of the world's largest copper producers, and a leading producer of molybdenum and cobalt. Shares of Phelps Dodge rose $2.99, or 3.8 percent, to $81.07 on the NYSE.

Steven Whisler, chairman and chief executive officer of Phelps Dodge, said the company was disappointed that the Falconbridge deal had fallen through.

"However, we are excited about our agreed combination with Inco, which will create both the world's leading base metals company and a must-own stock for investors who want exposure to our leading positions in copper and nickel," he said in a statement.

Under terms of Inco's agreement with Falconbridge, Inco will receive $150 million as a result of the failure to meet the minimum tender condition. Inco will receive a further break-up fee of $300 million in the event that Xstrata succeeds in acquiring Falconbridge.

Inco had also agreed to sell the Nikkelverk refinery and other assets to LionOre Mining International Ltd., in the event its bid for Falconbridge was accepted. Because of the failed result, Inco must pay a break-up fee of $32.5 million to LionOre.