Editorial: Deal-makers, breakers

The deal-makers have been busy, these last days of summer, with three takeover bids in the news. The deal-breakers have been even busier, so let’s consider them first.

Inco has given up on a merger with Phelps Dodge, conceding that management had not put together enough proxies to win a scheduled vote of Inco shareholders. Phelps Dodge shareholders would have been next up to vote on the merger, and were, from all accounts, disinclined to have their cash used that way, so nobody was giving that deal much of a chance. Certainly after the first phase of the mega-deal — the Falconbridge-Inco merger — didn’t happen, the logic of the big combination of North America’s base metal miners unravelled.

When Inco chief executive Scott Hand agreed with the rest of humankind that the proposed merger with PD was a goner, he salvaged more credibility than he would had the merger been brought to a vote.

He will need it as Inco beats the bushes for another white knight bidder, to get more for its shareholders than the surviving $86-a-share bid from Companhia Vale do Rio Doce. Inco, having invested so much credibility in the virtues of the Falconbridge takeover — particularly those cost-savings that were going to appear in Sudbury, Ont. — now finds itself in the awkward position of selling itself as a creator of synergies somewhere else.

Stornoway Diamond’s bid to take over Ashton Mining of Canada is smaller than who-gets-Inco, but vastly more interesting. Stornoway, hoping to create a large diamond development platform, is offering $59.5 million cash and about the same amount in paper for Ashton, and has locked up Ashton’s principal shareholder, Rio Tinto. Rio was to get $2 million if the bid failed.

Stornoway has now announced that the world’s most unusual break fee — one to be paid to a shareholder, rather than a bidder, if something better came along — is being modified to cover all shareholders. Rio, for whom sums like $2 million come out of a box in the receptionist’s desk drawer, is not much hurt by having this fee spread around, and the modification to the offer silences an objection Ashton was ready to take to the British Columbia Securities Commission.

Ashton said the fee was an inducement to Rio to tender “to a lesser offer than they otherwise might accept.” Possibly true of a lock-up; but not true of a payment that comes out of the bidder’s hide when shareholders reject a takeover offer. If anything, it is an incentive to hold out for another offer — and more so, when minority shareholders that have not locked up their shares with Stornoway also share in it.

In fine: if you tender, we pay you. If you don’t tender . . . we still pay you. It is an odd inducement, but an even odder use of Stornoway’s cash. We cannot see the analogy Ashton was anxious to make between this fee and the side-deals the Ontario Securities Commission condemned in the Sears Canada takeover offer. In our view, the effective argument against the Stornoway offer is that Ashton has the better projects, and its shareholders a mittful of undervalued assets. Why not simply fight on that field?

We return, then, to the deal-makers, whose late triumph is the friendly merger deal between Goldcorp and Glamis Gold.

Awakening Rip van Winkles will be confused by the offer of 1.69 Goldcorp shares for one Glamis. When they nodded off back in early 2005, it was Glamis offering one share for 1.09 Goldcorp, and that was a Goldcorp that didn’t have the Wheaton, Placer Dome, or Virginia Gold Mines assets. To Rip, it must look like ambition is crowding out financial discipline.

For some more historical perspective, consider that a shareholder of Western Silver, taken over by Glamis in May, will get 1.16 Goldcorp shares for each share of Western he held. A share of Francisco Gold, which Glamis took over in 2002, is now worth 2.62 Goldcorp shares. The Western acquisition accounts for about 75% of Glamis’s reserves, and the old Francisco assets for most of the rest.

But that also means that Goldcorp is paying about US$300 per gold-equivalent oz. to get those reserves (the prime motivation for making the offer, according to Goldcorp’s Ian Telfer). Goldcorp paid around US$130 per oz. for the Placer Dome assets it bought earlier this year, and about US$140 per resource oz. for Virginia Gold Mines. Goldcorp is not buying Glamis’s reserves so much as it is buying the takeover premium the market was already attaching to Glamis.

It is little wonder that the public opposition to this deal is coming largely from Goldcorp shareholders.