VANCOUVER – The battle for Aurizon Mines (ARZ-T) is getting nasty.
The backstory, in brief, goes like this. On January 14th Alamos Gold (AGI-T) made an unsolicited cash and share bid for Aurizon worth $780 million. Aurizon formed a committee, assessed Alamos' bid, and soon recommended that its shareholders reject the "financially inadequate and opportunistic offer."
Aurizon also swallowed a poison pill, which is industry jargon for when a company adopts a shareholder rights plan. Such plans are designed to make unfriendly acquisitions prohibitively expensive for the acquirer for a period of time, during which time the target company can assess its option. Alamos opposed the poison pill but the British Columbia Securities Commission (BCSC) ruled in Aurizon's favour and the rights plan stuck.
That gave Aurizon time to search out a bid it liked better – and find one they did. On March 4th Hecla Mining (HL-N) rode into town as a white knight offering $796 million for Aurizon, in a friendly deal supported by Aurizon's board of directors.
At first glance the Hecla deal seemed straightforward and Aurizon's board was – and remains – adamant that it is superior to the Alamos deal. Hecla offered Aurizon shareholders roughly 10¢ more per share than Alamos had offered - $4.75 per share compared to $4.65 – and Helca's offer came with a cash payout cap of $513.6 million, versus Alamos' $305 million cash cap. More generally, Aurizon's board argued that Hecla was simply a better fit for Aurizon's operations and Aurizon's advisors determined in favour of the Hecla deal.
However, it is upon second inspection that the details of the Hecla deal start to look a bit odd.
For one, Hecla doesn't have enough cash on hand, so it arranged to borrow US$500 million to fund the cash portion of its bid. As collateral for that debt, Hecla agreed to hedge at least US$450 million worth of gold from Casi Berardi, the gold mine it would be getting from Aurizon. That means merging with Hecla would put Aurizon's mine and shareholders in a company with US$500 million in debt and limited exposure to any upside in the price of gold.
Under the Alamos offer, the combined company would be debt free and unhedged. From that perspective, argues Alamos president and CEO John McCluskey, Hecla's extra 10¢ per share no longer seems as important.
"No other gold company stepped forward to best our offer," said McCluskey in an interview with Business News Network. "The company that did step forward, a silver company, was only able to do so by securing a $500-million loan against the very asset it would be acquiring, and in doing so it is encumbering that asset with a $450-million hedge position that essentially kneecaps that mine for the next three or four years… They shouldn't be trying to create companies that are candidates for bankruptcy."
The story continues. Aurizon's advisers did find in favour of the Hecla deal. However, Alamos was quick to point out that The Bank of Nova Scotia was one such adviser…and it is also the bank lending Hecla the US$500 million it needs to finance its bid.
That brings us to the most confusing part of the battle. The Hecla deal requires approval from 66.7% of Aurizon's shareholders and 66.7% of its affected security holders. If that support fails or the deal falls through for any other reason, Hecla is entitled to a break fee of $27.2 million.
Both of those are fairly normal components in a takeover. In this case, though, the devil is in the details.
Alamos owns 16.1% of Aurizon. That means Alamos can derail the Hecla deal by simply securing support from Aurizon investors representing another 17.2% the company's shares. That's not a large number. In fact, as of March 7th Alamos had already banked support from 29.5% of Aurizon's shareholders, including its own holding, leaving it needing less than 4% more.
And, as McCluskey pointed out, the only shares that matter are the ones that vote and voter turnout is never 100%, especially for companies that have been listed for a long time. Aurizon has been publicly listed for 25 years so McCluskey predicts only 80 to 85% of Aurizon's shareholders would vote, which would mean Alamos already has enough support from Aurizon shareholders to block Helca's bid.
As such the existence of the break fee is hard to understand. Aurizon and Hecla knew when they drafted their deal that Alamos owned 16.1% of Aurizon. Why, then, did they set the threshold of required support from Aurizon shareholders so high, since it meant Alamos only needed to garner support from 17.2% of Aurizon shareholders to derail the deal? And with derailment so attainable, why did Aurizon agree to the $27.1-million break fee?
Perhaps Aurizon only did the math after signing the Helca deal. That would explain the company's latest move, which was to adopt another shareholder rights plan. The new plan is intended mitigate the "substantial risk that Aurizon shareholders may be coerced into tendering to the financially inferior Alamos offer in order to avoid being left as minority shareholders in a company controlled by Alamos."
The situation described therein – that Alamos could end up controlling Aurizon – is very real, because Alamos has not only been doing its math but acting on it. On March 5th the company changed two aspects of its bid: it extended the offer's expiry date and waived its 66.7% minimum tender requirement. With that requirement waived Alamos will retain any Aurizon shares tendered to its bid, which means it could end up with a large stake in Aurizon even if it is not able to take over the entire company.
To prevent precisely that, Aurizon's new shareholder rights plan stipulates that the Alamos bid will remain suspended unless 50% of Aurizon's outstanding shares are tendered to it, not including the ARZ shares Alamos already owns. That means the plan would require Alamos to earn support from investors representing 66.1% of Aurizon's shares, starting with the 16.1% Alamos already owns. Unless that happens, Aurizon will continue as a going concern until its shareholders have a chance to vote on the Hecla deal at a meeting scheduled for May.
"The changes to Alamos' bid and public statements of their intent make it clear that Alamos simply wants to impede shareholder choice by denying Aurizon's shareholders any opportunity to consider other transactions, such as the Hecla arrangement," said George Brack, chairman of the special committee of Aurizon's board of directors. "The new rights plan does not prevent Alamos or any other party from making a better offer. It simply ensures that Aurizon's shareholders will have an opportunity to make a choice."
For its part, Alamos thinks the new poison pill is "ludicrous" and says it is Aurizon that is trying to deny shareholders the right to choose.
"Contrary to the assertions of George Brack of the Aurizon board, Alamos is forcing no one to tender to its offer," said McCluskey in a statement. "We believe Aurizon shareholders should have the right to choose either way. It is the Aurizon board through poison pills and egregious break fees that is effectively blocking Aurizon shareholders from tendering to the Alamos offer. If the Alamos offer is inferior, as the board asserts, what does the board have to fear?"
Alamos also thinks the poison pill and break fee are illegal. The company filed an application with the BCSC seeking an order to immediately remove the poison pill. Alamos is also asking the BCSC to prevent payment of the break fee to Hecla, on the grounds that the fee may constitute an improper defense tactic or be otherwise inconsistent with takeover bid law in Canada.
The BCSC will hear arguments on the case on March 15.
Alamos' shareholders have not been very excited about their company's engagement in this battle. The day Alamos announced its Aurizon bid, AGI share lost $2.02 or 12%. They stayed between $14.70 and $15.50 for a few weeks and then slid further, to their current hover near $14.50.
As for Aurizon, its share price jumped from $3.40 to $4.65 on news of Alamos' offer in mid-January. Within a few days they climbed to as high as $4.80, but then started losing ground to trade below $4.50. News of Hecla's bid did little for ARZ shares, which have not risen above $4.55 since Hecla's $4.75-per-share offer.
In fact, the drama hasn't helped anyone's share price. The day Hecla bid for Aurizon its share price fell 12% to US$4.07. It has since regained half that ground.
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