Trio of billion-dollar mergers: just the beginning?
Merger mania is back on Wall Street. Within one week, three billion-dollar mergers have been made by cash-rich companies -- most of it from oil profits -- for mineral-rich mining companies.
First, Standard Oil of California (Socal) offered $4 billion for Amax, a Greenwich, Conn-based mining company; then Seagram's, the Bronfman-controlled distiller, flush with $3.7 billion in cash from its sale of its own oil interest , bid $2 billion for St. Joe Minerals, a major lead and zinc producer; and, finally, Standard Oil of Ohio (Sohio), its coffers full from selling Alaskan crude, bid $1.77 billion for Kennecott Copper Company.
"I wouldn't be surprised if these mergers are just the tip of the Iceberg," says Ed Ix, an oil analyst and portfolio manager with Dreyfus Corporation, the large brokerage house. Robert LeVine, an oil analyst at E. F. Hutton, another brokerage firm, agrees, noting, "I wouldn't be surprised if every one of the oil companies is looking at potential acquisitions."
The oil companies are buying the mining companies, Mr. LeVine says, because "they see an underutilized resource which is depressed along with the commodity prices." The analyst says that the oil companies also have a "huge cash flow" as a result of the decontrol of prices. Even with the windfall- profits tax siphoning off 80 percent of their profits, Mr. Ix says, the remaining 20 percent is sizable.
Another big reason for the mergers is the companies' perception that politically the time is ripe for such acquisitions. "If the Justice Department were the same as Carter's last year," Mr. Ix says, "something probably would have been said about such moves. . . . I still wonder if something isn't going to be said about the concentration of American resources in the hands of a few companies."
According to the Wall Street Journal, oil companies now produce 35 percent of the country's copper, 25 percent of the uranium, and 25 percent of its coal.
Analysts say another reason the oil companies are investing in the metals industry is their perception that minerals, like oil, could become a "strategic resource." Mr. Ix comments, "There is a preoccupation with President Reagan and Secretary of State [Alexander M.] Haig with strategic metals and our low stockpiles. The thinking goes, "If oil can become a cartel, maybe copper and some of the rare earths could also.'"
There is little doubt that the oil companies are buying the mining stocks cheaply. Copper is selling at around 81 cents a pound, a level that is reportedly at the break-even point for many of the manufacturers.
In fact, just last week, Phelps Dodge, the nation's second-largest copper producer, said it would cut back its production at its Morenci, Ariz., plant. (Phelps Dodge is also the subject of some speculation concerning a possible takeover by Harry Oppenheimer, the South African industrialist, who has reportedly stockpiled $800 million in Bermuda for a possible acquisition. Mr. Oppenheimer heads up Anglo-American/DeBeers group, the largest gold and diamond mining company in the world.)
Once the world economy turns around, however, analysts expect that copper prices will surge. Mr. LeVine is estimating that Kennecott could earn $400 million in 1983 if copper prices rise to $1.75 a pound. If they were to stay high for a while, Sohio would get its money back quickly.
This is what happened when Atlantic Richfield purchased Anaconda Copper for $ 600 million. "Copper prices were in the tank," Mr. LeVine notes, "and everyone said it was a bad investment. But once prices went up, everyone said it was an intelligent investment." Last year, Anaconda made $120 million. This year he estimates it will earn $130 million to $140 million.
Although the oil companies are now making enormous earnings, Mr. Ix says they could be looking at a declining oil industry for the next 10 to 20 years. Thus, he notes that they could be saying they must get into a new business over the period.
Mr. LeVine also notes that the companies have been frustrated in their attempt to invest in new potential oil exploration areas, since a large portion of Alaska and offshore lands have been closed to drilling for environmental reasons. Still, they will be investing $50 billion in new drilling this year.
One interesting aspect of the Sohio bid for Kennecott, Mr. LeVine says, is that it may prompt Standard Oil of California to pay more money for amax. "My initial reaction was that Sohio paid too much money for Kennecott," Mr. LeVine says, "but in retrospect it looks like they bought a friendly deal, unlike the Amax bid."
Seagam's offer for St. Joe might also prompt a higher bid. St. Joe immediately rejected the offer, and many analysts felt the bidding war was just beginning.
Other potential suitors named included the Royal Dutch/Shell/Scallop group. Scallop, part of the Royal Dutch/Shell group, is a partner with St. Joe in a mining project involving a $680 million investment by Scallop. However, Mr. Bronfman is unl ikely to be put off lightly.