The latest development in Barrick Gold Corporation’s (ABX) bid to acquire Newmont Mining Corporation (NEM) was largely expected and unsurprising. The unsolicited advance was rejected on March 4 by Newmont’s board of directors.
“Our thorough review of Barrick’s unsolicited proposal and its associated risks has reaffirmed our conclusion that the combination of Newmont and Goldcorp (G) represents the best opportunity to create value for Newmont’s shareholders and deliver industry-leading returns for decades to come,” said Gary Goldberg, Newmont’s CEO, in a press release.
Newmont argues that Barrick’s proposal does not constitute a “Newmont Superior Proposal” as defined under its merger agreement with Goldcorp.
“Realizing value through Barrick’s proposal for Newmont’s shareholders hinges entirely on a new management team that lacks global operating experience and is only two months into its own transformational integration,” Goldberg said.
Morningstar analyst Kristoffer Inton points out that Newmont management does not believe it can legally engage in merger discussions with Barrick, which creates further complications to a potential deal. He adds that Barrick faces the additional challenge of time, as Newmont’s and Goldcorp’s deal is set to close in the second quarter of this year.
Market isn't seeing money for the move
“We believe current prices imply that the market thinks an improved offer would be needed to entice Newmont shareholders on to Barrick’s side. We continue to think Newmont’s Goldcorp acquisition is likely to close, and that the combined company will be unpalatable for Barrick to acquire given the pro forma size. All three companies’ no-moat ratings and fair value estimates are unchanged: Barrick at $16 per share; Goldcorp at $14.50 per share; and Newmont at US$38 per share. Goldcorp’s and Newmont’s fair value estimates continue to assume their transaction closes,” Inton says.
Newmont also published a proposed joint venture term sheet for Barrick’s Nevada assets. Barrick has argued that the acquisition is necessary, as a single management team will be most effective.
“Although Newmont’s proposed structure is more complicated (as any joint venture will tend to be), we don’t think it prevents synergy realization, as both parties still have incentives to maximize value. In addition, Newmont’s term sheet proposes its joint venture ownership at 45%, giving control to Barrick,” Inton says.
Newmont CEO Gary Goldberg has said that the company is open to negotiation on joint venture terms.
But is this rejection the end of merger discussions, or could we see more bids and negotiations a couple of years down the road? Inton says it depends on two things.
Not the end of deal discussions
“First, if Newmont and Barrick can’t agree to a JV for the Nevada assets, then all those synergies still make a deal enticing. If they do a JV, then there’s not as much reason to do a deal in the future. Second, it depends on the relative sizes of the companies. Newmont Goldcorp might need to divest a bit to get to a size where Barrick can acquire it. As it is today, Barrick acquiring Newmont Goldcorp in an all-share transaction would leave Barrick with less ownership in the combined company (and thus lose control)—an outcome that seems likely unpalatable for Barrick,” he explains.
This deal is unlikely to have an impact on the larger gold mining business. Inton points out that M&A is common in the industry because companies can shape their mine portfolio with deals.
“But several years ago there was a huge M&A wave before gold prices dropped rapidly, which made all those premiums the companies paid turn into huge value destruction for shareholders. I think that’s why this time around, you see Barrick doing no-premium offers like it did with Randgold and is trying to do with Newmont, or Newmont acquiring Goldcorp at what we thought was a good price. There aren’t a lot of other very large gold miners that are going to be very attractive for mergers, so I don’t think this spurns M&A activity,” he says.
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