Phelps Dodge

(PD) - Get Report

is running into stiff opposition in its efforts to sell an ambitious northward expansion to Wall Street this week.

The copper giant's management got a rude reception Tuesday in New York during a meeting with a group of top institutional investors to pitch the planned three-way acquisition of

Inco

(N)

and

Falconbridge

. The combined stock-and-cash deal, valued at $40 billion, would add a whopping $17 billion of debt to Phelps Dodge's balance sheet.

People who attended the meeting say a top portfolio manager with

Lehman Brothers'

(LEH)

Neuberger Berman asset management group loudly denounced the three-way merger, calling it a bad move for Phelps Dodge shareholders. S. Basu Mullick, the manager of Neuberger's $2.1 billion Partners Fund, argued the deal would add too much debt to Phelps Dodge's balance sheet and be dilutive to future earnings, attendees told

TheStreet.com

.

Mullick, whose Neuberger fund owned 2.3 million shares of Phelps Dodge as of March 31, declined to comment. Neuberger is Phelps Dodge's 15th largest shareholder, and its opposition to the deal could sway other institutional investors to vote against the transaction, which is scheduled to close in September.

Several hedge fund managers who also were at the meeting at the Park Avenue Café in Manhattan say they came away believing the complicated deal may be in trouble.

Others were less concerned. One hedge fund manager who is inclined to support the deal says Mullick's opposition needs to be weighed against the fact that a variety of Neuberger funds have sold some 3.6 million shares of Phelps Dodge over the past several months.

Shares of Phelps Dodge, most recently trading at $80.53, are down nearly 3% since before the deal was announced Monday morning.

Phoenix-based Phelps Dodge is in the midst of a cross-country road show to sell the complex transaction, which has the copper-producing firm simultaneously acquiring two Toronto-based companies that both are fending off hostile takeover bids of their own. The merger would create one of the world's biggest producers of nickel and copper ore.

Executives from Phelps Dodge were in Boston on Thursday, selling the merger to New England investors. Those same executives expected to fly to Toronto later in the day to meet with Canadian fund managers.

"We have no comment at this time about specific shareholders that oppose the deal,'' says a Phelps Dodge spokesman. "Management team is out meeting investors. It's not really appropriate to comment about specific meetings."

The Phelps Dodge spokesman says once a proxy statement for the deal is filed, the company expects shareholders will come to "understand the opportunity that management is excited about.''

But beyond the proxy, many investors are also waiting for a clear signal from hedge fund Atticus Capital. A $12 billion New York fund, Atticus is Phelps Dodge's second-largest stockholder. At last count, Atticus owned 12.4 million shares, or 6% of the company's outstanding stock.

Officials with Atticus, who had a private meeting Tuesday with Phelps Dodge executives, appear poised to give a thumbs-down to the deal. A spokesman says: "We are not convinced on the merits of an acquisition of Inco and Falconbridge. A return of capital or the outright sale of Phelps Dodge would be preferable."

Earlier this year, Atticus and Phelps Dodge's management got into a war of words over what the company should do with its growing cash hoard. Atticus argued that Phelps Dodge, which had about $2.2 billion in cash on its balance sheet at the time, should start returning capital to investors.

In February, Atticus turned down an offer to take a seat on Phelps Dodge's board, after the company rebuffed its overtures.

"As one vote among 12 individuals

Phelps' other directors who neither own a significant investment in Phelps Dodge nor have to date shown any great interest in engaging with us, we do not see any greater ability to effect change by joining your board,'' wrote Timothy Barakett, Atticus' co-founder and chairman, in a Feb. 15 letter to Phelps Dodge Chairman and CEO J. Steven Whisler.

In conjunction with the merger, Phelps Dodge says it now plans to spend $5 billion on a stock buyback, a move the company might be doing with on eye on appeasing Atticus.

Ironically, Phelps Dodge had rebuffed Atticus' earlier calls for a buyback by saying the hedge fund's demand that it finance the buyback with debt was "reckless.'' In a Feb. 15 press release, Phelps Dodge's CEO said: "We believe their demand to add a substantial debt burden to Phelps Dodge at this point in the metal-pricing cycle to fund an additional stock buyback program represents a reckless bet that could threaten our company's future.''

Critics, however, note that in paying for the three-way merger and the $5 billion stock buyback, Phelps Dodge will be increasing its debt burden by $22 billion.

Soon after the deal was announced, credit-rating agencies Fitch Ratings and Moody's Investor Services placed the company under review for a possible downgrade of its corporate debt. Moody's says given that the deal will be "funded by a significant amount of new debt,'' it is "concerned about the combined company's financial position should metals prices retreat from their currently very high level.''

Whisler has said in various interviews that the debt load would be paid off quickly, mostly because of rising metals prices.

Simon Constable contributed to this report.