Vancouver – What was supposed to be a friendly merger between HudBay Minerals (HBM-T) and Lundin Mining (LUN-T, LMC-N) is turning into nasty battle, as groups of HudBay shareholders demand the right to vote on what they see as an over-priced takeover of a marginal company without concern for shareholder value.
The deal, announced Nov. 21st, calls for HudBay to issue 0.3913 shares for each Lundin share, transforming Lundin into a wholly-owned subsidiary. The share ratio values Lundin shares at $2.08 a piece, representing a 32% premium. The agreement also commits HudBay to loan Lundin $135.8 million, which it will recoup in the form of some 97 million Lundin shares.
When the companies announced their merger plans on Nov. 21st, HudBay investors were not impressed. News of the plan drove the major’s share price down 40% in one day, closing at $3.16. Within hours one merchant bank announced plans to try and abort the merger by wrestling control of HudBay away from its current board. Within days another fund challenged HudBay to respond to charges the deal constitutes gross mismanagement and gives no possible benefits to HudBay or its shareholders.
The main bone of contention is that HudBay has $900 million in the bank and operates profitable mines in stable jurisdictions – its operations are primarily in Manitoba, where it three mines and a concentrator-smelter complex – whereas Lundin is weighed down by almost $300 million in debt, has mines that are at present barely profitable, and is facing liquidity problems. And despite Lundin’s problems, HudBay is still paying a considerable premium in the deal.
Interestingly, Lundin may have found a partial solution to its debt problems: the company just announced a non-binding agreement to sale its Aljustrel zinc mine in Portugal to private company MTO. Lundin recently put Aljustrel on care and maintenance because it could not find a way to operate the mine profitably.
But back to the merger: HudBay’s CEO Allan Palmiere continues to defend the deal vigorously, arguing that market valuations are currently irrational. He points out that the merger more than triples HudBay’s zinc reserves and doubles its copper reserves, that the new HudBay will be the third-largest diversified mining company on the Toronto Stock Exchange and will have the finances to navigate these turbulent markets, and will own a truly global portfolio of producing assets with a strong pipeline of development projects.
Another key issue is that HudBay shareholders have no say in the decision. Since Lundin is being acquired, Lundin shareholders have to approve the plan. HudBay, however, is the purchaser and as such does not have to win shareholder approval for the deal, even though the company will be more than doubling the number of shares it has issued.
Jaguar Financial (JFC-V) is the merchant bank trying to intervene to stop the merger. The lack of shareholder approval is one of the reasons the bank, which owns roughly 1% of HudBay, so dislikes the deal.
“Call it what you will – call it a merger, call it an acquisition – the reality is it’s a major transaction and to do it without shareholder approval is frankly mind-boggling,” said Jaguar CEO Vic Alboini in an interview. He thinks the Toronto Stock Exchange should mandate shareholder approve for large share issuances, calling the current situation “incredulous”.
Moreover, Jaguar does not think it is legal for the merger to go ahead without shareholder approval. The bank argues that the 97-million share private placement, which will leave HudBay as the largest Lundin shareholder at 19.9%, makes HudBay an insider of Lundin before the merger. In addition, two men sit on the boards of both Lundin and HudBay. The end result, according to Jaguar, is that the deal is a related-party transaction. That means it does require approval from HudBay shareholders.
Jaguar contends the related-party nature of the deal is deeper, and darker, than that. First, Alboini points out that the merger would leave Lundin shareholders owning slightly more shares of HudBay than current HudBay shareholders. To that end Jaguar says the deal should more properly be called a reverse takeover of HudBay by Lundin; it also means the transaction would result in a material change of control of HudBay, which should necessitate shareholder approval.
Second, Jaguar takes issue with the history of deal-making between key members of the two companies and with the profits both have seen from those deals. Alboini says the deal would be the third time Colin Benner, one of the men who sits on both the Lundin and HudBay boards, and HudBay’s Palmiere have acquired each other’s companies.
Benner was CEO of EuroZinc Mining until it merged with Lundin in 2006. He then took on the role of vice-chairman of Lundin, where he stayed until receiving $2.25 million for resigning in January. Benner then became CEO of Skye Resources, HudBay’s previous takeover target. After four months of work, Benner received $4 million for his termination when HudBay took over Skye, plus a transaction bonus close to $3 million.
Jaguar also takes issue with HudBay’s use of GMP Securities to give a fairness opinion on the deal because GMP, having worked with Lundin andHudbay, is “clearly conflicted”. And Jaguar points out that the deal gives management at Lundin and HudBay the chance to re-set the prices on their options, which are dramatically out of the money at present.
“It appears the same parties that benefitted from the Skye acquisition – Messrs. Palmiere, Benner, and GMP – also stand to benefit from the Lundin transaction, at the expense of HudBay shareholders,” concludes Alboini in a recent news release.
Jaguar is working on two possible solutions. First, the bank along with other HudBay shareholders collectively representing about 5% of HudBay has initiated a proxy battle. The group has requisitioned a shareholder meeting where it plans to try and replace the current HudBay board with eight “completely independent nominees”, one of whom would come from Jaguar. Second, it is preparing a take-over bid for the company as a whole. If it succeeds on either front its first order of business would be to share out a significant portion of HudBay’s $900 million through a dividend issuance.
If it succeeds with its takeover bid, Jaguar no longer plans on selling HudBay’s assets and dissolving the company, which was its stance two weeks ago. Alboini says after talking to shareholders his group is seriously considering maintaining the company as an operational unit, but would of course not go ahead with the Lundin deal. It is important to note, however, that the deal is a binding contract and it is unclear how, or if, Jaguar would be able to get out of the agreement without the prospect of being sued by Lundin.
“You gotta listen to your shareholders and that somehow was totally forgotten here,” said Alboini. “It’s incredulous that anybody would agree to this transaction when Lundin is out of money. To rush out and bail out any company and pay a premium – it is absolutely preposterous.”
Palmiere took time in a recent conference call to respond to Jaguar’s allegations and plans. “First and foremost the Jaguar proposal however presented is designed to strip the company of its cash…in this environment cash is king and in our business combination the cash remains inside the company, providing a secure foundation from which we can grow as and when markets improve,” Palmiere said.
Palmiere also defended the men who sit on both boards: “Contrary to Jaguar’s implications, neither of the directors they named participated in or attended any meeting in which the transaction was discussed.”
Finally, the HudBay CEO responded to the charges that the deal is a related-party transaction. “In this instance I find it very difficult to see how this could possibly be construed as a related-party transaction and that opinion is shared quite strongly by our legal counsel,” he said. “If you look at the modus operandi of Jaguar they typically do make allegations about management and so while this transaction is larger than most of their initiatives the tactic is not unique.”
Jaguar is not alone in arguing against the merger. Corriente Master Fund has issued two news releases in recent weeks deriding the deal and demanding a response from the HudBay board to what Corriente sees as insurmountable problems. Corriente’s issues are almost identical to Jaguar’s problems: the deal represents an ill-advised use of too much cash to buy a company with many liabilities and little to offer, from a board that is related to the Lundin board and advised by a conflicted broker.
“It is appalling that HudBay’s management seeks to put its shareholders in the position of having to look to governmental agencies or exchanges to properly govern the company and protect their interests as shareholders,” Corriente wrote in its latest release. “There is no tenable basis on which the board could approve a transaction that valued Lundin’s common stock at a 115% premium to the market price.”
HudBay’s share price has regained a bit of the ground it lost on news of the merger and is now trading around $3.50. Lundin’s share price has not move significantly in recent weeks, staying close to $1.
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