I Still Can't Believe Freeport-McMoRan Inc. Spent $20 Billion on This Oil and Gas Deal

In early December 2012, Freeport-McMoRan (NYSE: FCX) unveiled a bold move to buy not one but two oil and gas businesses, agreeing to pay roughly $20 billion in a combination of cash, stock, and the assumption of debt for Plains Exploration & Production and McMoRan Exploration. Doing so would give the copper and gold miner a diverse set of long-life assets that were generating robust cash flow and had attractive growth prospects.

But the real driving force behind Freeport-McMoRan's acquisition was a desire to take advantage of low borrowing rates so it could capture the upside it saw ahead for commodity prices. That's evident from the following comments from CEO Richard Adkerson in the press release announcing the deal: "We anticipate that attractive debt financing markets and our strong balance sheet will allow us to finance a significant portion of the transaction using low-cost debt and enable FCX shareholders to retain the significant value we see in our existing asset base, while enhancing future value-generation opportunities." 

In fact, Freeport-McMoRan had already lined up $9.5 billion in financing to complete the transaction, which would saddle the pro forma company with $20 billion of debt. However, it was comfortable with that level of leverage because the combined business would generate $9 billion of operating cash flow given where commodity prices were at the time, enabling it to quickly de-lever. Or so it thought.

Continue reading

Source: Fool.com