» Gold Fields to dig deeper in SA » Gold Fields' great escape

THEY may wear suits and speak in highfalutin financial lingo, but the bankers enlisted to press home or defend against Harmony Gold's spectacular US$8bn bid for Gold Fields will shape more like street fighters in an alley battle.

Early exchanges between the two sides suggest that the tussle for possession of Gold Fields will make AngloGold's pitch for Normandy Mining, an Australian company it extravagantly failed to buy in 2002, a lesson in garden party etiquette.

That's possibly because the antagonists ' Ian Cockerill, Gold Fields' bespectacled CEO, and his impish counterpart at Harmony Gold, Bernard Swanepoel ' know each other so well. This is no mid-Atlantic squall, but a burning family row. An acrid civil war.

In preparing for the battle, Gold Fields appears to have the more impressive advisory team, with Goldman Sachs, JP Morgan and investor relations giant Brunswick fighting its corner.

Investec, HSBC and Beachhead, a small investor relations company hoping to apply the rapier to Brunswick's broadsword, have gloved up for Harmony. At first glance, Harmony's team looks lightweight. The belated addition of Merrill Lynch suggests that the gold producer recognised the need for more bulk in the US, where 31% of Gold Fields' shareholders live.

Both sides have started to unroll their strategies, with more expected to come ahead of 7 December, the date set for a Gold Fields' shareholders' vote on a merger with Canadian firm IamGold.

First, however, the telephones have been burning with contumely. For example, take the 17 October leaking of Harmony's intention to bid for Gold Fields, a strategy allegedly launched by Gold Fields itself. That was in order to pre-empt and hurry Harmony's own announcement of the deal and allow Gold Fields to make a near immediate riposte.

Cockerill says that he first learnt about the bid on Saturday night (16 October) in a phone call from Swanepoel. The Gold Fields board assembled the next day but couldn't make a decision on the way ahead as too little information was provided.

However, days earlier there was a breakfast meeting between Cockerill and Swanepoel. According to market sources, Swanepoel gave no hint of any possible approach even though Cockerill discreetly interrogated his rival. 'We probed at the breakfast, but we didn't learn anything,' Cockerill says.

Swanepoel was equally reticent in a separate meeting with Lord Robin Renwick. That Renwick subsequently resigned his nonexecutive post at Harmony Gold in favour of retaining his vice-chairmanshipof JP Morgan's investment banking division suggests that he was as surprised as Cockerill that Swanepoel intended to strike for Gold Fields after all. Officially, Renwick's JP Morgan had decided to help defend Gold Fields ' therefore the conflicts of interest were obvious.

Clearly, these acts of strategic positioning have set the tone for the confrontation. The cut and thrust continues. Swanepoel says that Gold Fields has already been wrist slapped by SA's Securities Regulation Panel (the JSE Securities Exchange's watchdog organisation) for frustrating actions. 'They've (Gold Fields) been obstructive in issues relating to the share register,' Swanepoel says. He expects similar frustrating issues in respect of whether Noril'sk Nickel is acting in concert.

It's worth noting at this point that the stakes are critically high for Cockerill and Swanepoel. Failing to consummate an important deal is one thing. Executives can withstand such shocks, as demonstrated by Bobby Godsell, AngloGold Ashanti CEO, who bounced back from the disappointment of failing to buy Normandy Mining by buying Ashanti Goldfields two years later.

But failing to consummate a deal, the consequence of which is the company's slow death, is quite another matter.

At the time of publication, the rand was driving towards US$1/R6,20 ' an economic python that's squeezing the life out of SA's gold mining sector. For Cockerill, he's in the throes of an international diversification plan. If he fails to push through, he can expect to book himself a long, recuperative holiday.

Harmony, however, is paying dividends out of debt, says Nick Goodwin, gold analyst for T-Sec. And its cash burn ' estimated by Peter Townshend, of stockbroker Barnard Jacobs Mellet, to be nearly R1bn in the June quarter ' is alarmingly detrimental and poses the question as to whether the Gold Fields bid is either audacious or desperate.

Swanepoel says that the initial plan (before the leak) was to announce the bid at the company's quarterly announcement (25 October). That's when Harmony will show a dramatic decline in costs and prove that its new operating plan for its struggling mines was turning the company around. Says Swanepoel: 'This bid is from a strong platform. We've good assets, thank you very much.'

So who are the bankers behind the deal and how will they set about outmanoeuvring each other? The big hitter for Gold Fields is Colin Coleman, MD of the revered firm Goldman Sachs International. He was nominated by the World Economic Forum in 1996 as one of its global leaders of tomorrow and was once part of JP Morgan, the company with whom Goldman Sachs will team.

Leading the charge for JP Morgan is Lord Renwick himself, a former British ambassador to SA, and Dag Skattum, MD of JP Morgan Securities plc.

One interesting sidelight is that JPMorgan was banker to Harmony from 1996 until earlier this year. That surely provides Gold Fields with invaluable information about its rival, including up-to-date information on its weakness and likely strategy. However, Investec is surprised that JP Morgan can provide advice to Gold Fields, since it numbered Harmony among its clients.

Meanwhile, Alan Parker ' described as one of the most accomplished contested deal spin-doctors and founding partner of flak-catcher firm Brunswick ' is personally devoting time to repel the Harmony bid. Incidentally, it was Brunswick that helped Standard Bank resist the merger proposals of Nedbank, a hostile takeover attempt to which the Gold Fields-Harmony deal is being most compared.

A source close to Harmony's advisory team acknowledges the strength of the opposition. 'But you don't go to a gunfight armed with a knife. We've planned for every possibility.'

Three of HSBC's team acting for Harmony ' Adrian Coates, Tim Morgan-Wynne and Jan Sanders ' are no strangers to daring hostile takeovers. They were the advisers who helped construct Randgold Resources' buccaneering, but ultimately unsuccessful, $1,8bn bid for Ashanti Goldfields.

Dennis Tucker, a sometimes bellicose but brilliant marketer, is the sharp end of Investec's contribution to Harmony's cause. Tucker, occasionally fond of baiting and lambasting the press, offered an uncharacteristic 'no comment' when approached regarding details of the company's attack strategy. Behind Tucker stands Andy Leith, joint MD of Investec, whom Tucker says is playing an integral part in supporting Harmony.

Finally, Harmony's decision to add the skills of Merrill Lynch's New York team is aimed at counteracting the activities of Chris Thompson, Gold Fields' nonexecutive chairman who is well networked in North America. Swanepoel says that there was no particular delay in introducing Merrill Lynch. 'They were just working to a different time line.'

Malcolm Dodds, founder of Resource Finance Advisors and a deal veteran of more than 100 listings and over 30 major corporate transactions, believes Gold Fields has the better advisory team. He rates the aggressive and competent nature of HSBC but is not sure that it's wise to use a local, on-the-ground player such as Investec.

But Kevin Kerr, GM of Investec's corporate finance division, counters that Investec has been one of the most active participants in SA's corporate world for years. It advised on the Nail deal as well as Comparex.

The strategies

The beauty of Harmony's attack is its simple contention that Gold Fields' proposal to reverse its international assets into IamGold doesn't create much value. As a result, Harmony has launched a paper bid for Gold Fields with an interesting enticement to hedge fund managers ' and other opportunist investors ' to immediately sell their Gold Fields shares to Harmony while remaining entitled to receive the full benefit of any increased consideration offered by Harmony.

Through this strategy, Harmony will know at a relatively early stage whether it has sufficient momentum to force through the entire deal. Hypothetically, Harmony needs only to control 15% of Gold Fields through this so-called 'early bird' offer in order to block the IamGold merger proposal.

Cockerill says that it's a clever strategy but believes value investors in Gold Fields are kicking against the offer, as it's allowing opportunists to drag the company down.

'There's been almost R5bn lost in the combined share prices of Gold Fields, Harmony and IamGold,' says Willie Jacobsz, Gold Fields' investor relations manager.

As part of the early bird offer, Harmony is relying on the success of irrevocable support pledged by Russian firm Noril'sk Nickel, which owns a further 20,2% of Gold Fields.

Gold Fields' defence strategy will likely turn on two ripostes. First, it will acknowledge the now infamous quip of Johann Rupert, once invested in Gold Fields of SA, father of Gold Fields, that you can't mix ice-cream and s**t. Harmony has been in dire straits owing to the pressure of the rand and the mature nature of many of its assets. For example, it's lost money over the past four quarters.

The R4bn cash pile at Gold Fields will be highly attractive to Harmony, plus the prospect offered by Kloof mine. It provides access to the second phase of the massive South Deep orebody that's jointly held by Canadian company Placer Dome and Western Areas.

But Harmony must first fend off plans by Gold Fields to question the legality of the irrevocable support provided by Noril'sk Nickel. A source close to Harmony's bankers claims that North America's Securities Exchange Commission (SEC), a regulatory body, has seen and approved Noril'sk's support.

But that's dodgy, says Dodds. There are ways to negotiate around SEC rules on concert parties, such as proving that two parties worked together to remove management ' a move that could be in the interests of all shareholders.

The application of concert party rules is triggered when two parties operate in their own interests exclusively. Noril'sk Nickel must first have promised the SEC that it would not, contrary to wide expectation, attempt to shear off Gold Fields' international assets should Harmony's takeover bid succeed.

Cockerill is keeping mum concerning the details of Gold Fields' defence plans. But he scotches suggestions that Gold Fields will modify its deal with IamGold such that Gold Fields shareholders have a larger share of the combined unit than the current 70% proposal. Says Cockerill: 'We'd not use this opportunity as a cheesy attempt to squeeze a better deal. We'll stick by it.'

Meanwhile, Harmony's plans to modify its own position by possibly improving the value of its own offer also look compromised. According to news service Bloomberg, Cape Town fund manager Allan Gray (also a 14% shareholder in Harmony Gold) hasn't immediately thrown its weight behind Swanepoel. It believes Harmony's 1,275 to every Gold Fields share undervalues Harmony, a position that discourages an increase in the premium for Gold Fields.

Swanepoel says that he's prohibited from commenting on the chances of lifting the offer price for Gold Fields. 'But the battle will revolve around the value proposition. That's why the early crystallisation of a premium (in the early bird offer) is so important.'

Peter Flack, a key figure in the famous putsch of Randgold in 1995, believes that after all the debate and spin, shareholders are being asked a simple question.

Says Flack: 'You burn the midnight oil, you drop everything for the thrust or the counter-thrust. But at the end of the day it's all about which management you want to manage these assets.'