Arthur Buchner: Nedbank

MONEYWEB, Alec Hogg, 18 October 2004

How the stock market reacted to the hostile bid by Harmony for Gold Fields – and what to expect going ahead.

MONEYWEB: Good evening from the Moneyweb Power Hour. Well, throughout the past week we’ve been wondering what’s happened at the world’s fourth-largest gold producer, South African-based Gold Fields Limited. At the Investec auditorium in Johannesburg this morning, smaller rival Harmony Gold launched what is shaping up to be a hostile takeover bid. If it’s successful, the enlarged company will be the world’s biggest gold producer and its most valuable by market capitalisation. Full details of that deal coming up, plus an assessment by our gold guru Nick Goodwin.

But first we welcome Nedbank’s Arthur Buchner. Arthur, you follow the markets very closely – not only on the derivatives side, but clearly on the stocks as well. The market tends to tell you very quickly who is winning in a takeover battle of this sort. What do you actually watch? What happens in the markets that gives you this indication?

ARTHUR BUCHNER: Well, if you look, everyone has been talking about the outperformance of Gold Fields relative to Harmony. And, over the last four to five days, you’ve seen that spread, which is the price differential between Harmony and Gold Fields, actually shoot out by 10%.

MONEYWEB: Just explain, in layman’s terms, what you mean by that.

ARTHUR BUCHNER: Well, if you look at the Gold Fields and Harmony prices about a month and a half ago, they were actually at the same level. Harmony’s been trading at R76, Gold Fields at R76. And for a gold stock to outperform the other – generally they trend together, they move together, and unless something major happens, the one finds new gold ores or external factors, they should generally track the trend. Now what happened is Gold Fields actually shot ahead of Harmony over the last three weeks, and last week, it was especially big, the movement that we had. So someone got wind of the transaction, or someone was clever. But I think someone got wind of what was going on and, for example today, when they announced the transaction – which is a spread transaction that basically said that you get 1.275 Harmony shares for every Gold Fields share – the Gold Fields actually traded at a higher price than that spread. Now what that indicates is that normally the hedge funds will come in, they will buy Gold Fields and they will sell Harmonys down to get the spread to where it should be. And then they will wait for a sweetener. So we’ve seen a lot of corporate action recently where the minority shareholders have said, “We want more”.

MONEYWEB: Let’s get back to that a little. When you say, “ask for a sweetener”, what will occur then is they will buy the shares, hopefully getting the person who is doing the bidding to push up their offer?

ARTHUR BUCHNER: Correct. We saw it with AngloGold Ashanti, where foreigners bought into Ashanti and sold AngloGold. They could do that because they could trade into the Ashanti share. And it’s a very common practice, the world over. So what they do is they push Gold Fields higher than what the offer price was, hoping that some time down the line they could negotiate a better price.

MONEYWEB: This is what happened immediately as the market opened. David Shapiro is also here with us – Dave?

DAVID SHAPIRO: There’s something very interesting about this deal – what they call the immediate deal. So what Harmony are saying is that, up to November the 26th you can offer us our shares up to 34.9% of the total deal. Because they’ve got the Norilsk 20.3% in the bag, they’ve got to try and accumulate quickly over 50%, maybe to put a stop on the Iamgold share. So they’ve made what they call an immediate deal. I don’t know what the correct wording is – early settlement.

MONEYWEB: You know what, David, you, Arthur and I are so close to this deal that we are talking Iamgold, we are talking Norilsk. People have got no idea what it’s about. But let’s come back to what Arthur was saying.

DAVID SHAPIRO: Why it’s important and – and that’s what Arthur is saying – there are immediate arbitrage opportunities now, on the early settlement deal. So you can actually buy Gold Fields and sell your Harmony almost immediately, knowing that after November 26th, you can get settlement, you can undo the deal. It doesn’t have to wait for something to happen for this deal to be effective. That’s where the trade is taking place now.

MONEYWEB: The experts are well informed. What about Joe Public? He’s not informed. Harmony, as we said right in the beginning, is a lot smaller than Gold Fields. It wants to buy Gold Fields – in other words, not quite a minnow swallowing a whale, but it’s a smaller fish swallowing a bigger fish. But the stock market very quickly tells you, as Arthur is saying now, in the movement of the prices, whether it’s going to be successful or unsuccessful. Give us the answer to that question.

ARTHUR BUCHNER: Well, what essentially happened this morning is we had a 1% premium trade to the market.

MONEYWEB: Suggesting it would be successful?

ARTHUR BUCHNER: Suggesting it would be successful, and maybe we can get more. But, at the close of the day, the market actually closed at a 5% discount to the offer price. Now, that’s very unusual, especially, as Dave said, where you have immediate settlement. Harmony will take your stock from you, whatever Gold Fields stock you’ve got, because they need to build up their, let’s call it treasure chest. You can effectively now buy Gold Fields and sell Harmony at a 5% discount, and then on the 26th November you can sell it on and make 5%. This is a great return, if you don’t have to pay MST, or UST as they refer to it now, and 1% brokerage. And all the hedge funds would get involved in that trade.

MONEYWEB: These are professional traders – these are the guys with lots of money who do this for a living?

ARTHUR BUCHNER: Correct. And they’re going to take a quick turn. And if you said to me, in one month you are going to make yourself 4%, I would say thank you very much, my bank and my managers are going to be very happy with it. What it does however say is: why did the market move to that discount from a premium? It means that someone has said, hold on, I quite want to get out of my Gold Fields, and I will be an aggressive seller. And they came in and actually pushed the Gold Fields price down, into the arbitragers who bought it – and they are happy with the R98 or the R100. They don’t want to wait six months down the line for maybe a deal to come about.

MONEYWEB: Arthur, does it tell you that this deal is going to be successful or unsuccessful, from what the market reads today?

ARTHUR BUCHNER: What the market told you at the close is that it won’t be successful – whether it be the other minorities of Gold Fields not accepting it. However, if there was a sweetener, maybe it would be successful. I personally think that, from a South African perspective, competition is good. So why bring Gold Fields and Harmony together? You’ve got AngloGold [indistinct] at 15 – gold stocks that you could have the choice of trading. I think we’ve got five, of which three of them are illiquid. I would think the competition authorities might look at it.

MONEYWEB: So we would only know that the tide has turned when the share price has moved to the other level? In other words, when Gold Fields trades at a premium, as it did first thing this morning, to the offer price?

ARTHUR BUCHNER: If it trades at a smaller discount. The discount of 5% is too big.

MONEYWEB: It”s a fascinating story. I know you might be a little confused with what’s going on right now because, as Arthur and David and I have been so close to this deal all day – it has been the talk of the town unquestionably, not only here, but internationally as well. In fact it was the front page lead this story, on the Financial Times of London. Not too often you get two South African companies that dominate the headlines there. But we will be going through what is a fascinating saga, talking to both Bernard Swanepoel, the chief executive of Harmony, the man who made the presentation this morning, and then later to Ian Cockerill, the chief executive of Gold Fields Limited, who is, as we speak, in a board meeting. Gold Fields called an emergency board meeting, they met this afternoon from 5.00 pm and Ian is doing his utmost to get out of that board meeting at 6.50 pm to talk to us later this evening.

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