Phelps Dodge Ball Deflates

Xstrata's revised bid comes just two days before the Thursday deadline for Falconbridge shareholders to approve Inco's "friendly" bid for Falconbridge. The speculation among merger-arbitrage hedge fund is that Inco will now either move to sweeten its offer or extend the deadline for the decision on its bid.

The revised offer from Xstrata would pay roughly 59 Canadian dollars a share for the remaining 80% of Falconbridge that the Swiss mining company doesn't own. Based on Monday's close, Inco's current offer values each share of Falconbridge at C$58.36.

But the Xstrata deal is all cash, while the Inco deal would involve a combination of cash and stock. The all-cash component of the Xstrata bid could make the hostile offer seem more attractive.

Phelps Dodge, in a statement responding to the revised proposal from Xstrata, said Falconbridge shareholders still do better with the planned three-way merger. The company says the deal values each share of Falconbridge at C$61.04, making Phelps Dodge's implied offer "superior to the Xstrata offer."

But that's not the way a number of Phelps Dodge shareholders see it.

People familiar with Phelps Dodge say an increasing number of institutional investors are siding with Atticus, which believes the copper company could best serve its shareholders by either buying back stock or putting itself up for sale. Phelps Dodge's management believes its biggest roadblock to selling the deal is Atticus, which owns 9.9% of the company's stock. Sources say management hopes to persuade Atticus to support the deal, but so far the hedge fund is reluctant to throw its support behind the merger.

A spokesman for Atticus, a fund with $12 billion under management, declined to comment.

In recent weeks, shares of Phelps Dodge have rallied , after dropping 10% in the days immediately following the announcement of the deal. Some on Wall Street believe the rally in Phelps Dodge shares is an indication investors believe the deal is in trouble and the mining company could find itself an acquisition target.

In Tuesday trading, the rally in Phelps Dodge shares showed no signs of abating. In midafternoon trading, the stock was most recently trading at $81.10, up 73 cents. The stock closed at $82.95 a share just prior to the merger announcement.