Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) announced on December 5th that it plans to acquire both Mcmoran Exploration Co (NYSE:MMR) and Plains Exploration & Production Company (NYSE:PXP) at substantial premiums to where these stocks had previously been trading. Plains is currently up 25% on the news, with Mcmoran Exploration rising 81%. Plains had purchased considerable Gulf of Mexico assets from BP plc (NYSE:BP) in September, which at the time had confused many investors as the company planned to finance the transaction by taking out a loan and then repaying that loan after selling natural gas assets. With demand for natural gas expected to increase going forward, this had not seemed like a good strategic move to many analysts. As might be inferred, Freeport-McMoRan and Mcmoran Exploration Co had previously been part of the same company, and have maintained a close corporate relationship. Plains Exploration & Production Company is a major shareholder in Mcmoran Exploration.
Upon closing the deal, Freeport-McMoRan Copper & Gold Inc. would become a large natural resources company providing copper, gold, oil, and natural gas. As such it will be highly exposed to the global economy- possibly even more so than it currently is, with the stock carrying a beta of 2.3. We’d also expect it to be less focused on its core mining business, and would note that most M&A deals destroy shareholder value. However, Freeport’s stock is currently down about 14% on the news; it’s possible that the addition of oil and gas assets turns out poorly for the company but less so than the market is currently anticipating.
Mcmoran Exploration Co’s stock price had been down over 40% for the year following a plunge in late November. The company had been reporting net losses- it is unprofitable on a trailing basis- and a delay in bringing an oil well into production. Trailing EBITDA had been $71 million. As a result we’d be fairly confident in saying that Freeport is overpaying for the company. Plains Exploration & Production Company had been trading at a forward P/E multiple in the teens, though the BP transaction and the expected sale of its assets complicate the valuation.