FCX and PD plan marriage by almagamation (copper and Gold)

Last Sunday FCX Freeport McMoRan made an offer to buy PD Phelps Dodge for $88.00 a share plus .67 shares of FCX stock. Is this a good deal? Will this create too much dilution?

I think this is pretty darn good deal for FCX. Let's look at the numbers:

PD
Shares outstanding: 203.99
Cash less debt: $3.17 billion
2006 forward EPS: $16.40
2007 forward EPS: $15.95
Total net income for 2007 at consensus: $15.95 x 203.99 million=$3.25 billion

FCX
Shares outstanding: 196.93 million
Cash less debt: -$76 million
2006 forward EPS consensus: $6.99
2007 forward EPS consensus: $5.65
Total net income for 2007 at consensus: $5.65 x 196.93 million $1.11 billion
New shares created: .67 x 196.93 million=131.94 million
Total new shares of the combined company: 196.93 million + 131.94 million=328.87 million
Total debt: ($88.00 x 203.99million)+ $76million -$3.17 billion=$14.86 billion
Total 2007 net income of new company: $1.11 billion+$3.17 billion=$4.28 billion
Current stock price: $61.86
Forward 2007 EPS of combined company: $4.28 billion/328.87 million shares=$13.01
Forward PE of the new company: $61.86/$13.01=4.75

This deal if it happens as advertised would create tremendous share holder value. The forward PE should be somewhere between 8 to 10. This would mean that the shares should be at $104.19 to $130.23. If copper and gold remain at their current levels, the EPS for 2007 could be quite a bit more. This combined stock could be a $180 to $200 stock with high copper prices.

The risks that remain are the deal isn't approved by share holders. We saw what happened when PD tried to aquire Inco and Falconbridge. The other problem would be if metal prices tumble next year. I think that both of these scenarios represent a real possibility.

I have to admire the way that this deal was structured even though there is debt. This debt could be paid off in a short period of time and it doesn't create too much dilution. If this deal goes through, it would be an amalgamation made in heaven.

GL investors

Disclosure: I am not currently long or short FCX or PD.

Note to all readers: This post and all other posts in this blog are for entertainment purposes only. All of the stocks described are very highly speculative. Investing in the stocks mentioned could produce severe losses if you were to invest in these stocks. None of these stocks represent a recommendation in any way. As an individual investor, you have to assume your own risk. Prior performance is no guarantee of future returns.