Gold Fields circles the wagons (November 02, 2004)

As part of its 3-pronged defence plan against Harmony Gold‘s (HMY-N) unwanted advances, Gold Fields (GF-N) has petitioned South Africa’s High Court to declare its smaller rival’s unsolicited takeover bid unlawful, and to block its implementation.

Gold Fields argues that Harmony’s all-stock offer does not comply with the South African Companies Act, as it fails to include a registered prospectus, something Gold Fields asserts makes the offer unlawful and of no legal effect.

Harmony is offering Gold Fields shareholders 1.275 of its own shares for each Gold Field share. The deal includes an early settlement on 34.9% of Gold Fields shares; that portion of the offer closes 30 days after the Oct. 18 launch date and will be followed immediately thereafter by a compulsory follow-on offer to acquire the remainder of its Gold Fields shares.

Gold Fields immediately shot down the bid, saying it “significantly undervalues” its assets and “completely disregards the significant value that will be created from the Iamgold transaction.”In its appeal to the court, the takeover target calls the early settlement portion of Harmony’s offer “an unlawful construct designed to evade the jurisdiction of various regulatory authorities.”

Gold Fields also says the offer is “a notifiable merger for the purposes of the Competition Act” and contends that the offer cannot lawfully proceed without prior notification to, and approval by, the competition authorities. It has asked the Competitions Tribunal to quash Harmony’s offer.Harmony counters that the early settlement offer does not require notification to the competition authorities, as its completion would not effect a change of control of Gold Fields. Harmony says only the follow-up offer requires such notification.

Gold Fields has also filed a complaint with South Africa’s Securities Regulation Panel (SRP), alleging Harmony is acting in concert with Russia’s OAO GMK Norilsk Nickel, Gold Fields’ biggest shareholder, with a 20% stake.

Harmony says its offer was pre-approved by the SRP and reviewed by the U.S. Securities and Exchange Commission prior to its announcement, and that Gold Fields’ objection is without merit.

Under South African merger regulations, once a party owns 35% of a company, it is obliged to make an unconditional offer for the remaining shares. Regulatory approval is also required for any deal that results in a change in control of a company.

Harmony’s plan to acquire, initially, a 34.9% stake in Gold Fields, coupled with the irrevocable support of Norilsk (and its 20% interest), would give the two a controlling interest that would enable them to block Gold Fields’ planned $2.1-billion merger with Iamgold (IMG-T). Harmony’s bid is contingent on Gold Fields shareholders’ rejecting the Iamgold transaction; it expires on Nov. 26.

Harmony’s plan recently suffered a scoring blow after Gold Fields set the record date for its American depository receipt holders (who hold about 25% of the company’s shares) to vote on the Iamgold proposal at Oct. 29. A shareholders meeting has yet to be scheduled, but the record date means Harmony will only be able to vote those Gold Fields shares acquired between Oct. 18 and Oct. 29 againts the Iamgold deal; the voting rights accompanying those shares tendered after the record date remain with the original owner.

Harmony shareholders are slated to vote on their company’s bid for Gold Fields on Nov. 12; the plan needs the approval of 75% of the votes cast. Harmony recently got a boost when Institutional Shareholder Services, the world’s leading independent provider of proxy voting and corporate governance services, recommended that shareholders approve the deal.

Gold Fields’ board plan to respond formally to Harmony’s bid by Nov. 3; Goldman Sachs International and JP Morgan are advising the company.

In related news, Lord Robin Renwick has resigned his post as one of Harmony’s non-executive directors to eliminate a conflict of interest that arose out of his other position as European vice-chairman of JP Morgan, the investment bank that is advising Gold Fields.

In a letter to J.P. Morgan Chase, Harmony Gold CEO Bernard Swanepoel argues that JP Morgan’s role as Gold Fields’ defence adviser presents “potential for serious conflicts of interest,” considering the bank’s “established relationship with Harmony.”

He also warns that Harmony will review all communications from Gold Fields for their consistency with J.P. Morgan’s previous actions on Harmony’s behalf.Harmony is being advised by Morgan Stanley, HSBC and Investec.

Even with the takeover battle becoming more hostile, Swanepoel recently took the unusual step of issuing an open letter to Cockerill. In it he calls on the Gold Fields CEO to join him in finding an amicable way to bring the two companies together, and “avoid enriching lawyers, disenfranchising shareholders, distressing employees and focusing on the negative.”

Harmony recently posted a fifth straight quarterly net loss of US$53 million for the three months ended Sept. 30. Still, that’s better than the US$85 million it lost in the previous quarter but around three times what it lost during the third quarter of 2003. Similarly, the company’s operating profit swung to US$21 million to the good from a loss of US$7 million in the June quarter. A year earlier, operations churned out US29 million in profits.

On the production side, Harmony’s gold output of 830,193 oz. was down 2.1% from the previous quarter; cash costs fell US$12 per oz. to US$380 per oz.

For its part, Gold Fields ended the September quarter with a net profit of US$16 million — up from a net loss of US$25 million in the previous quarter, but off pace from the US$576 million earned the previous year. During the latest quarter, the company’s operation generated a profit of US$72 million, compared with US$83 million during the previous quarter, and US$ 77 million a year ago.

Gold Fields’ recent quarterly gold production slipped slightly to a shade more than 1 million oz.

With around 490 million Gold Fields shares on issue, Harmony would have to issue about 625 million new shares to complete a takeover. Based on closing shares prices on the New York Stock Exchange on Nov. 1, the deal values Gold Fields at around US$7.5 billion, and represents a 5.5% premium over Gold Field’s share price.