[miningmx.com] — EXXARO Resources has learned a bunch since its last attempt at a takeover, the failed A$123m bid for Territory Resources, an Australian-listed firm. As evidence, just look how much more difficult Exxaro has made it for an interloper to table a rival bid.
Even before announcing its A$338m bid for African Iron, all the relevant documents for shareholders had been prepared such the deal can be closed by February 14. Barely a week into the new year, as investors are dusting off their laptops, Exxaro springs a transaction which was at least a year in the making with a 30-day expiry.
Similarly, all regulatory boxes have been checked both on the South African and Australian side. African Iron’s board fully supports the offer; even Cape Lambert Resources has agreed to sell, in two stages, its full 25% stake in African Iron.
As if discouraging a rival bid, Exxaro is also paying a handsome 49% premium, assuming 75% shareholder acceptance is given to the deal, enough to see African Iron delisted – although an analyst tells me this kind of premium is standard fare now for valuable exploration in growth assets.
It would seem Exxaro has this transaction sewn up…. Well, not entirely.
Predictably, speculation is circulating that Xstrata, which is digging for iron ore in the region, as well as Glencore and Anglo American are preparing rival bids. There’s also the acknowledgement by Exxaro’s finance director, Wim de Klerk, that the company didn’t confer with Equatorial Resources, a 20% shareholder in African Iron, ahead of its bid. Given that “deal certainty” was uppermost in Exxaro’s mind in constructing this transaction, that’s a rather odd omission.
Not so, says De Klerk: “We could have spoken to all shareholders (including Och Ziff and Blackrock which own 14% of African Iron between them) but we didn’t,” he says, implying that Exxaro had to draw the line somewhere.
Equatorial Resources CEO, John Welborn, declined to comment on which way his company would vote on the matter. He did say, however, that Equatorial Resources was dedicated to building its own mine in the Republic of Congo (RoC). “The focus of the team and the background of the management is in providing capital into a pathway for development,” said Welborn.
This would suggest Equatorial Resources will be tactical with Exxaro, not necessarily cooperative. It will have doubled its investment having bought into African Iron for A$0.30c/share in June last year, but may yet not sell into the offer, notwithstanding the premium. It was also suggested by another analyst that the reason Exxaro didn’t confer with Equatorial Resources is that it considered the Australian firm a rival for African Iron.
It’s debatable Equatorial Resources has the balance sheet to rival Exxaro’s offer where the potential payout is about a third of its market cap. But it could pledge its shares to a larger company and encourage it to make an rival offer to Exxaro’s, or going a step further, consider a regional consolidation of both companies.
“We believe that Exxaro’s offer could tempt other suitors in the region looking for near term iron ore production with rail and port access,’ said Charles Cooper, an analyst with UK-based Oriel Securities. “A regional consolidation play for AKI (African Iron) and EQX’s (Equatorial Resources) assets appears increasingly likely, we think.’
Said another analyst: “You can’t discount a major coming in. Don’t discount Glencore. Don’t discount Xstrata which already has a footprint in RoC.’ As for Anglo American, it seems to prefer current cash flow hence its offer for De Beers, and having seen capex double at Minas Rios, as well as infrastructural delays, it may prefer to stay out of greenfields development assets. But is a diversified likely to enter the fray; might they prefer to play in the established iron ore fields of Australia, for instance?
Perhaps more likely is that Exxaro looks to execute a two phase strategy by seeking to take over Equatorial Resources itself at a later date, and that Welborn’s attitude to the offer is that by not vending in, he’s stating Exxaro would have to pay more for the consolidation it wants.
Welborn certainly knows Exxaro’s offer has drawn attention to the RoC’s iron ore potential and that investment interest will almost certainly focus on his company (which would also help to reverse a terrible slide in the firm’s share price amid a falling iron ore price last year).
Said Fairfax, a UK stockbroker: “Exxaro has managed this takeover well securing Cape Lambert agreement ahead of the bid which comfortably gets it over the 50% mark. To achieve 75%, they could require all or part of the Equatorial holding last recorded at 19.9% on an undiluted basis’.
Given the speed with which Exxaro has moved, any counter offer will have to be some five or six days before Cape Lambert pre-bid acceptance agreement and African Iron board members’ commitment to the Exxaro offer comes into effect, according to Ocean Equities, a stockbrokerage in London. It thinks Equatorial is unlikely to launch a counter bid as is the possibility of third party offers.
