Harmony’s first pass nets 10.8% of Gold Fields

Harmony Gold (HMY-N) has acquired 53.4 million, or 10.8%, of Gold Fields (GFI-N) issued share capital under the early settlement offer its two-part US$6.7 billion hostile takeover bid, less than a third of what was sought.

Harmony’s initial offer was designed to acquire up to 34.9% of Gold Fields’ shares (just shy of a controlling interest under South African law), and included 1.275 of its own shares for each Gold Fields share.

Russia’s OAO GMK Norilsk Nickel, Gold Fields’ biggest shareholder, with a 20% stake, has already agreed irrevocably to vote its share block against Gold Fields’ plan to merge its international assets with those of Iamgold (IMG-T).

Harmony had planned to do likewise, until a recent ruling by South Africa’s Competition Appeal Court concluded that Harmony could not vote any of the shares acquired under the early-settlement offer against Gold Fields’ plan.

In its ruling, handed down on Dec. 26 (the final day of the first phase of Harmony’s two-part takeover bid), the court found that Harmony’s bid qualifies as a notifiable merger for competition purposes and may not proceed until its is formally approved by competition authorities.

“The low take-up of this offer is a clear indication that our shareholders recognise that Harmony’s offer falls woefully short on value,” said Gold Fields CEO Ian Cockerill. “The fact that only 10.8% of shares were tendered signals that Harmony will never be successful in gaining control of the company with such an undervalued and ill-conceived offer.”

“Harmony is in a no-win situation. They cannot vote any of the shares they have acquired. Their offer does not provide our long-term shareholders anything that resembles value, just Harmony’s overvalued shares, no cash and no control premium.”

Cockerill suggests Harmony should withdraw its offer and “concentrate on addressing its own problems and not seek to transfer them to our shareholders.”

Still, Harmony CEO Bernard Swanepoel says that he is “delighted that we will be starting the subsequent offer with 30.9% of Gold Fields’ shares behind us and consider that this provides strong impetus for the ultimate success of the proposed merger.”

Harmony’s follow-on offer aims to acquire the balance of Gold Fields’ shares under the same terms as the early offer. The company says that while it has no plans to do so, it reserves the right to increase the terms of its subsequent offer; any shareholders that tendered to the initial offer would have their compensation topped up.

The subsequent portion of Harmony’s bid is conditional on Gold Fields’ planned deal with Iamgold being nixed by Gold Fields shareholders at a vote slated for Dec. 7. If the Iamgold deal were nixed, Gold Fields would be on the hook for a US$20-million break fee payable to Iamgold.

In other news, South Africa’s Securities Regulation Panel has refused to block Harmony’s offer. While the panel agreed that Harmony’s two-stage offer does indeed constitute a single offer, it concluded that the company is not acting in concert with Norilsk.

Gold Fields also recently added to its loss column after the Supreme Court of Appeal dismissed its petition that it declare Harmony’s bid unlawful and block its implementation.

“Yet another of Gold Fields’ legal challenges to our offers has been decided in our favour,” said Harmony chief executive Bernard Swanepoel. “Gold Fields has expended significant time and money on these frivolous legal and regulatory challenges in its attempts to divert shareholders’ attention from what Harmony believes are full and fair offers.”

The exchange ratio under Harmony’s offer implies a value of US$13.60 for each Gold Fields share, based on Harmony’s closing share price in New York on Nov. 26; Gold Fields shares ended at US$14.27, with the market expecting an increased offer from Harmony. The case for that higher bid recently got a boost when Gold Fields’ independent financial advisor ABSA Bank concluded that Harmony’s offer is materially unfair to Gold Fields shareholders.

News of Gold Fields’ successful appeal sent shares in Iamgold 35, or more than 4%, higher to $9 in Toronto on Nov. 26.