Riddles plague Barrick-Homestake deal
By: Tim Wood
Posted: 06/25/2001 11:00:00 PM | © Miningweb 1997-2001
NEW YORK -- Why did Homestake do it? That's the question dominating both the sell-side and buy-side as investors try to get to grips with what the merger with Barrick will mean.
-
At face value the deal is undoubtedly attractive. It creates a gold company that will light up fund manager radar screens thanks to its sheer size and the fact that these are North American firms with assets close to home. At last there's a company whose production and reserves can justify the premium rating over global number one AngloGold.
Not so fast. While there is a good deal of praise for the idea, there's concern that things have been rushed. Indeed, during an analyst conference call on Monday, Jack Thompson, Chairman and Chief Executive Officer of Homestake said negotiations were just two weeks old and that he initiated discussions.
"It's a crazy deal. The pooling of interest laws expire at the end of the month, so it looks as if it was done in a rush. It is not value accretive on an NPV basis, an earnings basis or on a return on investor capital basis. It goes against the gold industry's current mantra to be more value conscious," says Rob Edwards, a gold analyst at HSBC Securities in Johannesburg.
'Pooling' is an accounting rule that allows companies to merge without having to amortize any premium over net asset value through the income statement. It is exceptionally beneficial to acquisitive companies since it masks the real cost of the purchase.
Edwards hits a nerve and Barrick confirms that the deal will not be earnings enhancing for the first year at least. That's obvious just by looking at the multiples accorded the two firms with Homestake the most expensive in the industry at 268 times earnings, while Barrick is priced at a rather lowly 19. The picture looks even gloomier if you consider that Barrick must enlarge its issued shares by 30 per cent to pay for Homestake.
Some of the promised accretion will come from ongoing administration and exploration synergies amounting to $55 million a year from 2002 and possibly even improving according to Barrick CE Randall Oliphant. That is insufficient though and the real answer probably lies in Barrick's stalled Pascua-Lama project.
It was mothballed late last year because of the low gold price and looks unable to be restarted without a significant improvement in prices or feasibility. But Pascua is nearby Homestake's nearby Veladero deposit, in which Barrick has a 40 per cent interest, and that might well be the primary trigger for the deal.
Analysts who have been on site at both projects say full-scale co-operation between the two is improbable if not impossible. The view is that Pascua is not nearly viable but that Veladero is. Barrick sans Pascua's reserves would not be well received, but Veladero can plug the gap very nicely.
It's a view backed up by a number of analysts who say the deal was all about juggling ounces to meet growth and valuation models. On that basis, stripping Pascua out of Barrick and factoring in Veladero might well tip the scales and show Oliphant to have happened on a masterstroke to do precisely what Edwards doubts – deliver more shareholder value.
But the speed of the merger remains worrisome. There is additional puzzlement as to why Thompson, widely respected for heading one of the best managed gold teams around, would want to deal with Barrick at all.
The are a number of explanations floating through the market. The least attractive is that Homestake managers have engineered fabulous golden parachutes for themselves. While that seems an improbable primary motive given Thompson's driven nature, it gains some credibility on the fact that he has no fixed position in the proposed company. Barrick CE Randall Oliphant said during the conference call that he would "recommend" to the board that Thompson become deputy chairman.
Barrick spokesman Vince Borg confirmed to Miningweb that exit packages have not been detailed. So the talk, including specific sums, can be thoroughly discounted for now. Nevertheless, the fact that so many details still need to be dealt with creates considerable uncertainty.
A Canadian analyst, who is recommending that clients accept the offer, says it must be viewed pragmatically. He says Thompson is astute at understanding and interpreting the value of his own company, especially with managers' wealth tied into the company – "these guys really do put their money where their mouths are."
He believes that the 31% premium to Friday's close is simply too good to pass up. Also, Thompson's enthusiasm for the deal must be seen as a clear signal to investors that this is not to be missed in terms of the overall gold mining investment climate.
However, that message is bearish for gold in the long term. If Thompson is satisfied with a 31% premium that values his shares at $8.71 a piece – a price last seen in November 1999 – then it must mean the idea of a rampant gold price is not in his reckoning.
That will come as a blow to gold bugs, the majority of whom remain convinced that bullion is on the brink of a fundamental turnaround.
Adding to the pessimism is the fact that Homestake shareholders, many deliberate investors in unhedged producers only, must take Barrick paper in exchange. That will sit in the craw and many retail investors will no doubt look to sell as close to the deal price as possible. The fact that Homestake closed 8 per cent short of that level today will create further anxiety about the chances of closing the deal without any revisions.
mips1.net |
