Update: Forsys cancels merger deal

Frustrated with continued delays to consummating its merger deal with George Forrest International Afrique (GFI), Oakville, Ont.-based Forsys Metals (FSY-T) has cancelled its agreement to be taken over by the company and is demanding that GFI pay it a $20-million reverse break fee.

In a statement yesterday, Forsys cited GFI’s repeated failures to deliver the funds needed to complete the $579-million deal as the reason for killing the merger plans. It said the company had already been granted multiple extensions regarding the money transfer dating back to March. GFI agreed to buy Forsys last November for $7 per share.

“It is disappointing that after all of the support and assistance that the company has given to GFI over the last several months, during very difficult economic conditions, that this transaction could not finally be completed,” said Forsys president and CEO Duane Parnham in a release. “As of today, GFI has not deposited any funds or provided evidence to the company’s satisfaction that funds are immediately available to enable GFI to complete the agreement.”

Parnham added that the deal was no longer in the company’s best interest and that it was reviewing all of its options. Forsys owns the fully permitted Valencia uranium deposit in Namibia.

GFI had not yet responded to the news.

Forsys’s announcement came only a week after Industry Canada halted the takeover deal in mid-August. Why is anyone’s guess, but the move is in line with changes made to the Investment Canada Act in March this year that aimed to increase the transparency of deals involving Canadian firms.

What has been confusing for some investors is that Forsys’s assets are all in Africa, so there are no concerns of a Canadian asset falling into foreign hands.

But government sensitivities increase when it’s a uranium deposit that’s involved, and indeed, the amendments to the Investment Canada Act were made, in large part, to keep track of what strategic assets other sovereign states may be acquiring.

There were rumblings that the source of GFI’s financing was what raised red flags at Industry Canada. There were rumours of possible Iranian dollars funding the deal and while that could not be confirmed at presstime, it is worth noting that the government of Iran already has a 15% stake in Rio Tinto‘s (RIO-L, RTP-N) Rossing uranium mine, which is on strike with and just 30 km from Forsys’s flagship Valencia deposit.

Parnham said Forsys remained unclear as to what Industry Canada’s specific concerns were.

Industry Canada did not answer any questions related to the situation.

In Toronto, Forsys shares were down 67¢ or 12.5% today in afternoon trading. The shares have traded in a 12-month range of $2-6.70.

The GFI offer has sounded alarm bells for some investors ever since it was first announced.

First, there was the hefty premium GFI was willing to pay at a time when other acquisitions were being made at a fraction of the cost. Next was GFI’s own admittance that it was having trouble securing financing.

Then, on Aug. 4, GFI announced that it had secured the funds but, oddly, gave no indication of where the money was coming from. The deal was set to close on Aug. 17.

George Forrest himself is no stranger to controversy in sub-Saharan Africa.

His family has been active in the region since 1922 through mining interests in the Democratic Republic of the Congo.

George Forrest continued with the family mining interests, but also delved into arms manufacturing through his ownership of Belgian-based New Lachaussee. He remains chairman of the company.

But it was his position as chairman of the DRC state-controlled Gecamines from 1999 to 2001 that led to the most controversy. His reign at Gecamines coincided with the worst time of war in the country, but that didn’t stop him from acquiring mineral concessions. That situation landed him in a 2002 United Nations report that stated Forrest’s role with Gecamines represented a conflict of interest.