- Randgold seen better operator, raising questions on lack of premium
- New management execution seen key to upside
- Flowback from listing change seen small
Randgold Resources’ [LON:RRS] proposed tie-up with Barrick Gold [TSX/NYSE:ABX] was wall crossed with key Randgold shareholders prior to the deal announcement, two sources and a person familiar with the situation said.
However, the lack of a deal premium had three top Randgold investors interviewed by this news service split: the first shareholder said his fund plans to vote for the deal, while the second said he still has reservations regarding the no-premium offer. A third shareholder was in favour of the deal, but stopped short of declaring plans to vote.
The two companies announced on 24 September a no-premium combination that would create a USD 18.3bn company listed in New York and Toronto. The agreement followed extensive tie-up discussions with gold peers, according to a previous report by this news service, and carries a 75% Randgold shareholder acceptance threshold.
Management spoke with key target shareholders in the UK and Europe prior to the announcement, the sources said. Conversations continue across both shareholder bases, the person added.
Initial concerns
The deal will see Randgold’s successful management take the reins at Barrick, the second shareholder said, but that means giving up shares in a well-run company in exchange for those in a larger, less well-run company. Randgold CEO Mark Bristow will become President and CEO of the combined group post-merger, and Randgold CFO Graham Shuttleworth will retain his role in the New Barrick.
In 2017, Randgold saw a 13.8% increase in profit to USD 335m, according to its annual report, while Barrick reported USD 1.4bn in net income in 2017, compared to USD 665m in 2016.
Randgold sees an attractive cash flow yield despite the current low gold prices, this shareholder said, which has run room to increase should the price improve. The Barrick offer should have taken this into consideration and included a premium, the second shareholder said.
What’s more, Randgold should have insisted on some sort of premium, and not doing so raises questions on the company’s underlying assessment of its exclusive focus on Africa.
Shareholders would also lose the valuation premium Randgold has so far enjoyed for being the only reliable, quality gold-play listed on the London Stock Exchange, the third investor said. However, the first source argued that the opposite is true: that Randgold’s African focus has caused the company to be undervalued.
A third shareholder agreed that there was little to be excited about with Randgold investors receiving no premium. However, the third shareholder was in favour of the deal because he viewed it as a positive for his holding in Acacia Mining [LON:ACA], whose majority shareholder is Barrick Gold with a 64% stake. An unintended consequence of Barrick’s tie-up with Randgold is that there could be a takeout bid for Acacia, he said.
Bull case
The lack of premium does have merits, the first shareholder, the sources and the person familiar said. In essence, the transaction will result in a reverse takeover of Barrick by Randgold’s management team, despite it being the smaller party and the acquisition target, the first source and first shareholder said.
In some respects, this deal can be seen as Randgold acquiring a suite of high quality assets, the first source said, and it could be argued that Barrick is the party that should have insisted on a premium.
The resource industry is consumptive, and this deal represents a means for Randgold to take control of some of the best assets in the world at a reduced price, the first source said. The deal allows Randgold to use its premium valuation to position its shareholders in a place where they have an effective one-third stake in the combined business.
If Randgold’s management, led by chief executive Mark Bristow, can run Barrick with the same level of success it has with Randgold, then the deal will be good for both sets of shareholders, the first shareholder said.
This will take three to five years, as the company disposes non-core assets to focus on a select group of tier one projects, this shareholder added. Barrick has previously identified its Hemlo, Kalgoorlie and Lagunas Norte assets as non-core, which could fetch USD 3.1bn in a sale according to an analyst note.
It will also take time to implement Bristow’s management style and successful exploration strategy across a larger company and two continents, the first shareholder said.
Since the deal announcement last week, Barrick’s share price has risen from USD 10.47 per share to USD 11.69. Randgold’s has risen from GBP 49.23 per share to 56.02.
The market can assess the merits of the deal based on the fundamentals of the tie-up, the first shareholder said.
The deal is good for both management teams, as it gives Barrick a capable and entrepreneurial team, and provides scope for Randgold to prove its ability on a global scale, this shareholder said, but that does not mean it is a good deal for Randgold shareholders.
Transferring Randgold’s stringent cost-structure to Barrick could help lower central costs at Barrick, the third shareholder said.
There will be a certain amount of flowback from index-linked stocks in Randgold due to the move away from the London Stock Exchange, the sources familiar said. The new merged entity, New Barrick, will retain Barrick’s listing structure on the NYSE and TSE exchanges, but lose Randgold’s position on the LSE.
However, this issue was also wall crossed with investors prior to the deal announcement, and the level of flowback will be relatively small, the source added.
There are no concerns about a move to TSE and NYSE, the second shareholder said.
Barrick and Randgold declined to comment.