Alamos on verge of derailing Hecla bid as battle for Aurizon builds

VANCOUVER — The battle for Aurizon Mines (ARZ-T, AZK-X) is getting nasty.

The backstory, in brief, goes like this. On Jan. 14, Alamos Gold (AGI-T, AGI-N) made an unsolicited cash-and-share bid for Aurizon worth $780 million. Aurizon formed a committee, assessed Alamos’ bid and soon recommended that its shareholders reject the “financially inadequate and opportunistic offer.”

Aurizon also swallowed a ‘poison pill,’ which is jargon for adopting a shareholder rights plan. Such plans are designed to make unfriendly acquisitions prohibitively expensive for the acquirer for a period of time, during which the target company can assess its option. Alamos opposed the poison pill, but the British Columbia Securities Commission (BCSC) ruled in Aurizon’s favour, and the rights plan stuck.

This gave Aurizon time to look for a bid it liked better — and find one it did. On March 4, Hecla Mining (HL-N) rode into town as a white knight, offering $796 million for Aurizon in a friendly deal supported by Aurizon’s board of directors.

At first glance the Hecla deal seemed straightforward and Aurizon’s board was — and remains — adamant that it is superior to the Alamos deal. Hecla offered Aurizon shareholders roughly 10¢ more per share than Alamos had offered — or $4.75 per share, compared to $4.65 — and Helca’s offer came with a cash payout cap of $513.6 million, versus Alamos’ $305 million cash cap. More generally, Aurizon’s board argued that Hecla was a better fit for Aurizon’s operations, and Aurizon’s advisors determined in favour of the Hecla deal.

But upon second inspection, details of the Hecla deal look a bit odd.

For one, Hecla doesn’t have enough cash-on-hand, so it arranged to borrow US$500 million to fund the cash portion of its bid. As collateral for this debt, Hecla agreed to hedge at least US$450-million worth of gold from Casa Berardi, the gold mine in Quebec it would be getting from Aurizon. This means that a merger with Hecla would put Aurizon’s mine and shareholders into a company with US$500 million in debt, and limit exposure to any upside in the price of gold.

Under the Alamos offer, the combined company would be debt-free and unhedged. From that perspective, Alamos president and CEO John McCluskey argues that Hecla’s extra 10¢ per share no longer seems as important.

“No other gold company stepped forward to best our offer,” McCluskey said in an interview with Business News Network. “The company that did step forward, a silver company, was only able to do so by securing a $500-million loan against the very asset it would be acquiring, and in doing so it is encumbering that asset with a $450-million hedge position that essentially kneecaps that mine for the next three or four years . . . they shouldn’t be trying to create companies that are candidates for bankruptcy.”

The story continues. Aurizon’s advisers did find in favour of the Hecla deal. However, Alamos was quick to point out that the Bank of Nova Scotia was one such adviser . . . and it is also the bank lending Hecla the US$500 million it needs to finance its bid.
This brings us to the most confusing part of the battle. The Hecla deal requires approval from 66.7% of Aurizon’s shareholders and 66.7% of its affected security holders. If this support fails or the deal falls through for any reason, Hecla is entitled to a break fee of $27.2 million.

Both of those are fairly normal components in a takeover. In this case, though, the devil is in the details.

Alamos owns 16.1% of Aurizon. That means Alamos can derail the Hecla deal by simply securing support from Aurizon investors representing another 17.2% of the company’s shares. That’s not a large number. In fact, as of March 7, Alamos had already banked support from 29.5% of Aurizon’s shareholders, including its own holding, leaving it needing less than 4% more.

And, as McCluskey pointed out, the only shares that matter are the ones where vote and voter turnout is never 100%, especially for companies that have been listed for a long time. Aurizon has been publicly listed for 25 years, so McCluskey predicts only 80–85% of Aurizon’s shareholders would vote, which would mean Alamos arguably already has enough support from Aurizon shareholders to block Hecla’s bid.

As such, the break fee’s existence is hard to understand. Aurizon and Hecla knew when they drafted their deal that Alamos owned 16.1% of Aurizon. Why then, did they set the threshold of required support from Aurizon shareholders so high, since it meant Alamos only needed to garner support from 17.2% of Aurizon shareholders to derail the deal? And with derailment so attainable, why did Aurizon agree to the $27.1-million break fee?

Perhaps Aurizon only did the math after signing the Hecla deal. That would explain the company’s latest move, which was to adopt another shareholder rights plan. The new plan is intended mitigate the “substantial risk that Aurizon shareholders may be coerced into tendering to the financially inferior Alamos offer, in order to avoid being left as minority shareholders in a company controlled by Alamos.”

The situation described therein — that Alamos could end up controlling Aurizon — is very real, because Alamos has not only been doing its math, but acting on it. On March 5 the company changed two aspects of its bid: it extended the offer’s expiry date and waived its 66.7% minimum tender requirement. With that requirement waived Alamos will retain any Aurizon shares tendered to its bid, which means it could end up with a large stake in Aurizon, even if it can’t take over the company.

To prevent precisely that, Aurizon’s new shareholder rights plan stipulates that the Alamos bid will remain suspended unless 50% of Aurizon’s outstanding shares are tendered, not including the Aurizon shares Alamos already owns. This means the plan would require Alamos to earn support from investors representing 66.1% of Aurizon’s shares, starting with the 16.1% Alamos already owns. Unless this happens Aurizon will be a concern, until its shareholders have a chance to vote on the Hecla deal at a meeting scheduled for May.

“The changes to Alamos’ bid and public statements of their intent make it clear that Alamos wants to impede shareholder choice by denying Aurizon’s shareholders any opportunity to consider other transactions, such as the Hecla arrangement,” chairman of the special committee of Aurizon’s board of directors George Brack says. “The new rights plan does not prevent Alamos or any other party from making a better offer. It simply ensures that Aurizon’s shareholders will have an opportunity to make a choice.”

For its part, Alamos thinks the new poison pill is “ludicrous,” and says Aurizon is trying to deny shareholders the right to choose.

“Contrary to the assertions of George Brack of the Aurizon board, Alamos is forcing no one to tender to its offer,” McCluskey says. “We believe Aurizon shareholders should have the right to choose either way. It is the Aurizon board, through poison pills and egregious break fees, that is blocking Aurizon shareholders from tendering to the Alamos offer. If the Alamos offer is inferior, as the board asserts, what does the board have to fear?”

Alamos also thinks the poison pill and break fee are illegal. The company filed an application with the BCSC seeking an order to remove the poison pill. Alamos is also asking the BCSC to prevent payment of the break fee to Hecla, on the grounds that the fee may constitute an improper defense tactic, or be otherwise inconsistent with the takeover-bid law in Canada.

The BCSC will hear arguments on the case on March 15.

Alamos’ shareholders have not been thrilled about their company’s engagement in this battle. The day Alamos announced its Aurizon bid, Alamos shares lost $2.02, or 12%. They stayed between $14.70 and $15.50 for a few weeks before sliding further, and are currently hovering near $14.50.

As for Aurizon, its share price jumped from $3.40 to $4.65 on news of Alamos’ offer in mid-January. Within a few days shares climbed to as high as $4.80, but lost ground to trade below $4.50. News of Hecla’s bid did little for Aurizon shares, which have not risen above $4.55 since Hecla’s $4.75-per-share offer.

In fact, the latest drama hasn’t helped anyone’s share price. The day Hecla bid for Aurizon its share price fell 12% to US$4.07. It has since regained half that ground.