Voting for bids; bidding for votes

The revisions to Glamis Gold’s bid for Goldcorp and to the terms of Goldcorp’s friendly merger with Wheaton River Minerals — both beneficial to Goldcorp shareholders — illustrate two things about the current takeover battle. First, nothing is as important as appealing to the Goldcorp shareholder before he votes on the Wheaton merger on Feb. 10. Second, he’s worth about four bits. American, that is.

Glamis increased its offer for Goldcorp by three-hundredths of a share — or US49 at market prices — conditional on the merger’s being voted down. Goldcorp said it will deal out a dividend of US50 per share if the merger is approved.

Glamis described the Goldcorp move as “a sign of pure desperation.” Well, yes, they’re buying votes. That’s what proxy fights are about.

The point is, of course, that neither side looks confident that it’s got the votes. If Glamis had the votes, there’d have been no increase to its offer for Goldcorp. For that matter, it could even have dispensed with the proxy fight — the knowledge that a better offer was on the table would have been enough for Goldcorp’s shareholders to vote down the bid for Wheaton.

If Goldcorp-Wheaton had the votes, there’d have been no special dividend to Goldcorp shareholders — at least not until Glamis tacked on its addition to the bid.

That’s what makes takeover bids interesting. Beat the other deal cleanly, and you’ll go away wondering if you paid too much. It’s better to win by a nose and go away knowing you paid just a little too much.

The ambiguity is also working on Goldcorp shareholders. At the centre of this is a division between investors — one admirably laid out by the combatants themselves. There are the gold bugs that want leverage to the gold price, there are those that want to make some money in mining just like they would in pipelines or auto parts, and there are the admirers of the deal-makers, who gravitate to executives like Goldcorp’s Robert McEwen and Wheaton’s Ian Telfer. How many shares are voted by each kind of investor will determine the outcome.

Glamis pushes the idea of a “pure gold play” for shareholders, offering a higher rating on the market. Certainly it’s reflected in Glamis’s selling point on multiples: “all-gold” companies trade for about 45 times earnings; gold companies with significant base metal production for about 30 times; Wheaton, the gold-copper hybrid, for about 18 times; and copper companies for about six times earnings. That probably pleases the dyed-in-the-fleece gold investors, who have come to expect the market to reward companies for not making much money mining gold.

But that means you can invert that figure with equally instructive results. Copper companies currently make 16 for every dollar their shareholders have invested. Pure-gold companies make about 2.

We’re still looking for the justification for the Street’s logic here. There could be an argument made that anyone with high-rated gold stock, faced with the choice of trading it for other high-rated stock or for lower-rated stock, is better to go for the paper the market likes better. But that’s not the point we see Glamis making: instead, the pitch is that a combined Glamis and Goldcorp will see greater production growth. Why look for growing production, though, if not to increase earnings? (We think the market has previously disposed of the argument that simply being bigger deserves an increased rating.)

What the proponents of single-commodity plays are really saying is that diversification limits volatility, and volatility, dear shareholder, is your friend. Other people give it unpleasant names like “risk” or “beta,” but a smart trader like you should have no trouble timing the market when you want to turn your holdings into something nice, like a sailboat or a sable coat.

The flaw in that argument is that there are other ways to bet on the gold price, readily available to qualified investors. And call options don’t have a management fee; companies, in a very definite sense, do.

The counter-argument — which nobody in the Goldcorp-Wheaton camp seems to have made, by the way — is that diversification limits risk. It’s not flashy, we’ll concede. Instead, it’s prudent, which may go some way to explaining how unpopular it is in financial circles.

What Goldcorp and Wheaton executives have said, in defence of the friendly combination, is that earnings do matter. We’d agree, and Goldcorp’s willingness to spin those earnings out to shareholders has set it apart from many other gold companies. Glamis knows better than to mess with that, and has pledged to keep the cheques coming. Making money is good.

Making deals can be good too, if they’re good deals. Everybody wants Wheaton this year. The pro-Glamis spin here is: if you want some Wheaton, call your broker. He’ll sell you some. There’s quite a lot of it.

Plenty can happen in the next few days. Who knows whether an alternative bid for Wheaton or Goldcorp might surface at the last minute? Maybe votes will be delayed or deadlines extended. But time is getting tight for bidders, their hats, and their rabbits.

So it’s fair to imagine at presstime that Goldcorp-Wheaton is a shareholder vote that will go down to the wire, as most previous consolidation bids have this year — something Wheaton shareholders will remember, to their cost.