Freeport deal triangle gets cozier and cozier

December 7, 2012

By Christopher Swann

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Freeport-McMoRan Copper & Gold’s foray into energy keeps getting cozier for the top executives involved. The U.S. mining group’s market value has plunged $6 billion following news of its planned purchase of Plains Exploration & Production and McMoRan Exploration. Yet Jim Bob Moffett, Freeport’s chairman, and James Flores, chief executive of Plains, will come out ahead.

A fund manager from BlackRock, whose investment units together own more than 6 percent of Freeport, gave the brass on Wednesday’s conference call a tongue-lashing, pointedly asking whether anyone involved in the deal wasn’t conflicted. For a start, the transaction offered up a headline 74 percent premium for McMoRan, a struggling oil company run and part-owned by Moffett. While other shareholders in Freeport nursed paper losses of 17 percent at New York market prices late on Friday morning, his gains on his McMoRan holding trumped his losses on Freeport stock to the tune of some $15 million.

Plains boss Flores, meanwhile, will get a $130 million windfall including accelerated vesting of stock, while also keeping a senior job at the enlarged Freeport, collecting a pay rise to match the $2.5 million annual salaries of Moffett and Freeport CEO Richard Adkerson, and joining them on the board. It will be a bit of a reunion, as all three currently are directors of McMoRan.

It’s hard to see how the triangular deal idea came from anywhere but the top, although the filings that should outline the process aren’t yet available. That brings echoes of the kind of governance flaws surrounding a deal two years ago in which J Crew CEO Mickey Drexler engineered a personally beneficial sale of the company to two private equity firms. Freeport and McMoRan each had a special committee of independent directors with advisers to evaluate the deal, and Moffett didn’t vote. Yet his position would have been clear.

Overall, it’s adding to the U.S. oil patch’s dodgy governance record, with Chesapeake Energy and SandRidge Energy other exhibits. Flores’ golden parachute – due even without losing his job – was written into his Plains contract, but that doesn’t make it any more palatable for Freeport shareholders. The high-priced deal for McMoRan raises the question of whether alternative targets could have represented better value. And that’s assuming Moffett’s diversification strategy makes sense.

Freeport’s shareholders don’t even get to vote on the deal. But that doesn’t mean they can’t push their board representatives for a full explanation.

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