Swiss-based Xstrata Plc jumped into the merger battle between three Canadian mining companies Wednesday with a C$20 billion ($18.1 billion) hostile offer for Falconbridge Ltd. that topped a friendly bid from Inco Ltd. .
The four-way contest for might in the base metals market comes as miners try to capitalize on near record commodity prices by expanding their global capacity, although the market corrected on Wednesday.
Swiss-based Xstrata, the largest contender in the fray, is trying to elbow aside Inco to grab Falconbridge, while Teck Cominco Ltd. wants to take over Inco and prevent Inco buying Falconbridge.
If successful, Xstrata, already Falconbridge's largest shareholder with a roughly 20 percent stake, would become the world's fifth-largest diversified mining company by market capitalization.
The deal would broaden Xstrata's geographical reach and add nickel to copper, coal, zinc and chrome operations. Xstrata said the combination would boost earnings and cash flow substantially in the first full year of consolidation.
It would also help Xstrata, under maverick chief executive Mick Davis, compete with larger rivals such as BHP Billiton and Rio Tinto Ltd., the world's two largest miners.
Davis said Xstrata had a Falconbridge transaction "on its drawing board for quite some time."
"He's not a small thinking guy. He's thinking about, how do I get to be number 3, number 2," said Kerry Smith, an analyst with Haywood Securities in Canada.
"That's what he wants to do, but he's not going to do it in a way that destroys value."
Xstrata said it would offer C$52.50 in cash for each Falconbridge share it does not already own.
That tops Inco's recently sweetened offer of C$51.17 a share in cash or 0.6927 of an Inco share plus 5 Canadian cents for each Falconbridge share.
A combination of Inco and Falconbridge would create the world's biggest nickel producer. Inco said on Wednesday it's deal would provide cost savings of $3 billion, while boosting cash flow and earnings.
A union between Teck and Inco, even without Falconbridge, would establish North America's largest mining company.
Falconbridge snubs Xstrata
Falconbridge dismissed Xstrata's offer as undervalued, and said it does not take into account the "unique and real synergies that are available from the Inco-Falconbridge combination."
The two Canadian companies, which first announced plans to merge last October, have major nickel operations in Sudbury, Ontario and have said they see at least $375 million in synergies a year.
Inco's offer has been extended three times over anti-trust concerns, with the latest deadline at the end of June. That delay opened the door for Teck, the world's top zinc miner, to launch a C$17.8 billion hostile bid for Inco on May 8. The deal is conditional on Inco scrapping its bid for Falconbridge.
"I think Inco really wants to do this deal (with Falconbridge), and I think one of the big issues, is how much can Xstrata go up, because this might not be Xstrata's last bid," said Charles Bradford, an analyst with Soleil-Bradford Research in New York.
Falconbridge's shares jumped as high as C$56.71 on the Toronto Stock Exchange, before easing mid-afternoon to C$55.02, for a gain of 2 percent. Inco fell 1 percent to C$72.58 and Teck dropped 4 percent to C$67.
Xstrata ended 5.3 percent lower at 1,990 pence, after an early rise as high as 2,198p, up nearly 5 percent on the day.
A London-based analyst said the Xstrata bid valued Falconbridge at 9 times estimated 2006 earnings and 8.7 times 2007 earnings -- cheaper than the 13 times earnings that BHP paid for WMC Resources.