John Paulson, founder of hedge fund Paulson & Co, knows a deal when he sees one. He famously bagged $20bn after shorting the US housing market ahead of the subprime mortgage crisis, readers may recall. Paulson is also pretty outspoken when something doesn’t smell right.
“I have absolutely no intention of voting for this deal,” he said in September 2014. “The concept is good but the execution, the way they are doing it with this [huge] dilutive equity offering ... It’s value destructive.”
“This deal” was a $2.1bn rights issue ahead of a demerger hatched by AngloGold Ashanti CEO Srinivasan Venkatakrishnan (Venkat). It came a year after Venkat’s appointment. The statement was a bold declaration of intent and also proved an incorrect assessment.
The market hated the deal. Shares in AngloGold shed 46% in two months. The GDX gold miners exchange traded fund lost 30% over the same period, but the selloff in AngloGold shares was enough to bury the proposal and deliver an early blow to Venkat’s career at the gold producer that was, on balance, a success.
Fast forward eight years and the parallels between AngloGold’s failed transaction and Gold Fields’ proposed $6.7bn takeover of Toronto-listed Yamana Gold are striking
Fast forward eight years, and the parallels between AngloGold’s failed transaction and Gold Fields’ proposed $6.7bn takeover of Toronto-listed Yamana Gold are striking. As with Venkat’s rights offer and demerger, Gold Fields CEO Chris Griffith is playing his cards early in his Gold Fields career of 14 months so far, effectively putting his reputation at risk before it’s truly established.
Crucially, Gold Fields is using SA paper, as AngloGold had attempted to do.
The structure of the transaction is that Gold Fields will offer 0.6 of its shares for each Yamana share. The exchange was a premium of 33.8% to the 10-day volume weighted average price of Yamana shares prior to the announcement of the deal on May 27. If it goes through, Gold Fields shareholders will own 61% of the combined group, which will be the world’s fourth-largest gold producer on the deal’s consummation.
It’s early in the piece to say for sure — especially as Griffith is at present in meetings with shareholders in the US — but the 17% slump in Gold Fields’ shares a week after the deal announcement suggests it’s in trouble.
As with AngloGold’s aborted rights issue, analysts think the concept behind Gold Fields’ proposed takeover of Yamana is a good one. If completed, Gold Fields overcomes a production decline expected to set in from about 2027 in the absence of corporate action.
But analysts also think it’s crazily expensive — a consequence of Gold Fields swapping its shares for higher-rated Yamana scrip. They also wonder why it was necessary for Griffith to play his cards now. Why didn’t he simply build a pipeline of projects piecemeal? Questions even extend to whether Gold Fields is hiding something that needs the instant address of its biggest-ever transaction.
“Our analysis shows that GFI [Gold Fields] shareholders will effectively pay 60% of its market capitalisation for 40% more production at a similar cost, equivalent to a 50% premium,” says Adrian Hammond, a gold analyst for Standard Bank Group Securities. “In our view, the shift in primary listing for Yamana shareholders from Toronto to Joburg and the relative underperformance of the stock after the announcement are not supportive of shareholders voting in favour.”
Gold Fields needs 75% of shareholder support, while Yamana requires 66.66% of the total vote to pass the deal. A break fee of $450m is payable by Gold Fields shareholders; $300m for Yamana shareholders. This may deter interlopers, which it is speculated may emerge, but the break fees raise questions of their own. Is Gold Fields at risk of paying a $450m break fee if its shareholders vote the deal down but Yamana Gold shareholders approve it?
Yamana Gold may be unfamiliar to SA readers, especially as most of its assets are in South America and a flagship operation, Canadian Malartic, is in Quebec. But it’s a sizeable midtier player in the world’s gold market. It has gold production of about 880,000oz a year and gold-equivalent production of just over 1-million ounces, including silver credits. It also consists of two major projects: Wasamac, which is a replacement for Canadian Malartic, and Mara in Argentina.
We believe this transaction will not be beneficial to the Gold Fields shareholders unless it results in a rerating of Gold Fields relative to its international peers
— Herbert Kharivhe
While the projects offer Gold Fields a powerful pipeline of future production growth, they also require big capital to develop. “We believe this transaction will not be beneficial to Gold Fields shareholders unless it results in a rerating of Gold Fields relative to its international peers,” says Herbert Kharivhe, an analyst for Investec Securities.
“We believe this can be achieved only through the timely execution of the project pipeline and not the mere consolidation of the two entities,” he adds. He’s suggesting that for Gold Fields’ plans to be a success, it will first have to take on major debt.
As for Yamana’s operating mines, they are either underground or, like Canadian Malartic, moving to underground production. (One analyst says it’s past its best). Normally a benefit of internationalisation for SA firms is to limit their exposure to deep-level mining with all its costly and risky labour intensivity.
Sven Lunsche, spokesman for Gold Fields, says talks with shareholders are ongoing. “We have until the third quarter to get the deal over the line,” he tells the FM. “From our side, we are convinced that there is long-term value in the transaction.”
Not all analysts are opposed to the transaction; far from it. Arnold van Graan, an analyst for Nedbank Securities, says the premium Gold Fields is paying is the cost of stepping up to the plate. “In the short term the deal could be seen as expensive, given the premium and given that Gold Fields trades at a discount to Yamana,” he says.
“SA-listed gold producers would always find it expensive to buy up their international rivals, due to the SA discount,” he says. “However, that is the price to pay to compete on a global scale.
“We expect Gold Fields to trade down due to the large implied premium, but investors could warm up to the story in due course.”
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