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Freeport-McMoRan in a World of Debt

NEW YORK ( TheStreet) -- I'm all for making smart acquisitions that are immediately accretive to earnings and diversifies a company's income streams.

But when it involves taking on a total of $20 billion in debt and paying rich premiums for the companies bought, I'm dubious at best.

The market's reaction to Freeport-McMoRan Copper & Gold (FCX - Get Report) announcement that its made an offer to buy Plains Exploration & Production (PXP) for $6.9 billion in cash and stock was not what FCX was hoping for.

(This story sounds good in many ways, as you can hear in this interview with TheStreetDirector of Research Stephanie Link. I'd encourage you to watch it as a good way to get the overview.)

Shares of FCX ended the trading day on Wednesday down 16% at $32.16 while shares of PXP soared 23.44% to close at $44.50.

As if that wasn't enough excitement for one day, FCX also said it would spend $2.1 billion for McMoRan Exploraton (MMR). FCX will also assume $11 billion of the debt of the acquired companies.

According to an Associated Press report released after FCX's press release, "The addition of the two companies will create a natural resources conglomerate with assets ranging from oil rigs in the Gulf of Mexico to mines in Indonesia.

"Plains Exploration, based in Houston, produces oil in California, Texas and the Gulf of Mexico, along with natural gas in Louisiana. McMoRan Exploration, based in New Orleans, is developing natural gas resources that lie deep below shallow water regions of the Gulf of Mexico."

Don't get me wrong, I'm all for recapturing past competencies and diversifying into the energy sector. But even analysts like Brian Yu at Citigroup who held fast to his "buy" recommendation were scratching their heads concerning the logic of the acquisitions and the high prices paid.

"We see little if any synergies between the copper mining and oil and gas drilling business to offset the premium valuation paid," Yu wrote. "Investors can get the same diversification in their portfolio at a much lower cost."
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