Noranda buys 11.7% stake in Falconbridge

After being outfoxed in its bid to buy a control block of Falconbridge Ltd. (TSE) shares from Placer- Dome Inc. (TSE), Noranda Inc. (TSE) has quietly gone to the open market and emerged as Falconbridge’s largest shareholder.

While the market was distracted by some heavy trading of the Falconbridge issue, Noranda acquired 8.7 million common shares of the giant nickel producer.

The acquisition, which represents about 10% of Falconbridge’s 86.8 million outstanding shares was made through the Toronto and Montreal stock exchanges and NASDAQ.

Noranda’s Vice-president finance, Will Barbour said his company started to buy the shares on July 1 at an average price of $22, the day after Falconbridge successfully outbid Noranda for a 24.9% control block of its own shares from Placer Dome. Outokumpu, Rio Tinto Zinc and Boliden Aktiebolag were among the rival bidders.

After obtaining Ontario Securities Commission approval, Falconbridge won independence from any controlling shareholder by paying $960 million for the control block.

Under the agreement with Placer Dome, Falconbridge was scheduled to pay a special $4.75-a-share dividend to all Falconbridge shareholders, including Placer Dome once it converted a $135-million debenture into common shares. Active issues

Since the date of record for the dividend was Aug 10, Falconbridge was one of the most active issues in the days leading up to the payment as European investors, anxious to avoid paying a withholding tax on the dividend, sold their holdings to Canadian brokerage houses. In a “dividend rental scheme, “common in the U.S., investors sell their stocks to brokers who receive the dividend before the stocks are resold to the same investors at a later date.

In trading on Aug 10, Falconbridge was the volume leader in the metals stock group on both the Toronto and Montreal Exchanges. It closed at $22 in Toronto before going ex-dividend.

“That’s why Noranda was able to accumulate Falconbridge stock without raising any eyebrows,” said Ernest Nutter, a mining analyst at Pemberton Securities of Toronto.

He said the resources giant was also able to take advantage of an Ontario Securities law which doesn’t require public disclosure of share purchases until the number acquired equals 10% of those outstanding. Betting man

While Noranda reached the 10% limit on Aug 15, Nutter reckons that most of the shares were acquired before the Falconbridge issue went ex-dividend. “If I were a betting man, I would say a significant number were bought before Aug 10 because the share price increased on big volumes,” said Nutter. “At the time, there didn’t seem to be any reason for the price increase.”

According to Alan Thomas, Noranda’s senior vice-president finance at least 50% of the 8.7 million shares were acquired before Aug 10. As a result, Noranda received a dividend payment of around $20 million on Aug 17, reducing the cost of the purchase from approximately $210 million to $192 million.

But if Noranda follows through with a plan to acquire additional common shares of Falconbridge on the open market or in privately negotiated transactions, the latter company’s free reign could be temporary.

In a statement to the Dow Jones News Service, Noranda Chairman Alfred Powis said Noranda would be interested in acquiring enough of Falconbridge shares to at least equity account for its earnings.

Under current accounting regulations, this would require a purchase of at least 20% of Falconbridge’s stock. Under the agreement with Placer Dome, Falconbridge is scheduled to announce the cancellation of about 12.5 million of its shares. That would raise Noranda’s indicated stake in Falconbridge to about 11.7%. Increase holding

“Noranda could sit back and increase their holding in Falconbridge by about 5% every 30 days,” said Nutter. “But that would be taking a gamble.” If another bidder comes on the scene, he said things will accelerate.”

“At the moment we are happy with the 8.7 million shares as an investment,” said Barbour. He declined to discuss the timing of any future Falconbridge share purchases.