The “Worth” Versus “Value” Game

It is hard to ignore the story about the takeover of Falconbridge, particularly after the company made an unusual move last week. Namely, Falconbridge decided to announce its financial results for, get this, one month! The company’s execs justified their decision by wanting to give the investors the right tools when deciding how to vote on the merger. The talk on the Street, however, is that this move was nothing more than an obvious attempt to heat up the already red-hot bidding war for one of Canada’s most valued mining companies.

We are inclined to go with the second motion, considering that for the month of April, Falconbridge posted triple-digit returns in almost all categories. Sure, the company had a lot to show for, but most of these gains were carried on a spectacular performance in the commodity markets. The million dollar question is, if the tide is turning, and it just may after the S&P/TSX Composite’s performance last week, how much of the Falconbridge worth, as well as real value, would endure the potential return of the bearish sentiment to Canada’s stock market?

Defining “value” on stock markets has, at best, eluded most of those who sought it, and at worst, it led astray those who believed they had it cornered. For that reason, I purposely make a distinction between value and what something is worth, the latter being much easier to grasp. Any company’s worth is best defined by how much someone else is willing to pay for it. The danger of this view is its temporary nature. By the same token, most times, temporal is the only dimension available to investors!

So, how things look right now for Falconbridge? Well, Falconbridge is bid for by two companies. The first bidder is Xstrata PLC, the Anglo-Swiss mining company and a current holder of 19.9% of Falconbridge’s outstanding shares. Xstrata’s offer is all cash, bidding CDN$52.50 for 80.1% of Falconbridge’s shares that Xstrata still does not own. The second bidder is Inco Ltd., offering a combination of cash and shares, and according to the latest count, Inco’s is the bid preferred by Falconbridge.

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Note that amidst the declining markets, Falconbridge is still trading above both bids. This means that both bidders might have to sweeten their offers, perhaps by a lot. This also means that the market wants them to sweeten their bids because it assigned Falconbridge more worth by aggressively buying the company’s shares.

Further confusing the worth versus value game are expiration dates for both offers. Xstrata’s bid expires first on July 7, while Inco’s bid is closely tied with antitrust allegations brought by the EU and U.S. Department of Justice. The decisions of both regulatory bodies are slated for mid-July.

Obviously, Xstrata is betting that Falconbridge’s investors will dislike the uncertainty of Inco’s bid and go for the sure thing. On the other hand, Falconbridge, preferring Inco’s bid, is lobbying Canadian regulators to delay Xstrata’s bid until Inco resolves its regulatory issues in the U.S. and Europe.

While all this has been going on, the question of value somehow slipped in the background unnoticed. Although there are voices out there worrying about fundamentals taking the backseat to strategies and CEO egos, they are very feeble and mostly ignored. Which is why I feel obligated to close the discussion about nickel turf wars by saying that a company’s value cannot be in the eyes’ of the beholder. This is where its worth firmly resides.

In my opinion, Falconbridge, the belle of the nickel ball, is fully valued and betting on a sector facing volatility in the months ahead. Perhaps it is time for investors to take the backseat themselves, let the events unfold, and then take the appropriate action.