There are more signs of trouble for Phelps Dodge's ( PD) ambitious $40 billion megadeal to acquire two Canadian nickel miners.The Phoenix-based copper miner recently canceled a meeting with a group of Wall Street metals and commodities analysts in New York. People familiar with Phelps Dodge say the meeting was a canceled to allow top executives at the copper company to spend more time on the road selling the merger to an ever-growing crowd of skeptical institutional investors. A Phelps Dodge spokesman could not be reached for comment. Phelps Dodge is seen as facing an uphill struggle in convincing investors that the complicated three-way merger with nickel miners Inco ( N) and Falconbridge ( FAL) is a smart move. A number of Wall Street analysts, none of whom wanted to be identified, say the deal is meeting with a lot resistance from institutional investors and added that Phelps Dodge executives have their work cut out for them. Two big institutional investors, hedge fund behemoth Atticus Management and Lehman Brothers' ( LEH) Neuberger Berman $2.1 billion Partners Fund, already are on record criticizing the deal, saying it is too dilutive to Phelps Dodge's earnings. Sources say other institutional investors may begin publicly expressing their displeasure with the megamerger over the next few weeks. News of the cancellation of the analyst meeting, meanwhile, comes as another mining company is throwing a potential obstacle into the three-way combination. Swiss-based Xstrata on Tuesday upped its hostile all-cash offer for Falconbridge by 12% to $16.2 billion. The move by Xstrata, which already owns 20% of Falconbridge, is seen as putting pressure on Inco and Phelps Dodge to respond in kind. In the proposed three-way deal, Phelps Dodge would gobble up Inco, after it first buys Falconbridge. The cash-and-stock deal would deliver a 22% premium to Inco shareholders.
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.