MONEYWEB, Alec Hogg, 18 October 2004
Tonight’s top story – Harmony Gold’s takeover bid for Gold Fields Limited.
MONEYWEB: Before we pick up with Harmony’s chief executive, Bernard Swanepoel, Barry Sergeant has been following the action. I know we were together in the Investec auditorium this morning, Barry. Give us some background.
BARRY SERGEANT: Alec, it was on Tuesday evening last week in this studio that we discussed market rumours of Gold Fields coming into play as a potential takeover target. We also speculated at the time that it had hired Goldman Sachs, the big-name Wall Street investment bank to advise it on a defensive strategy. Gold Fields said “no comment”. On Friday, it was of note that gold stocks closed on average slightly higher on Wall Street, the world’s latest-trading large stock market, Gold Fields, however, surged by more than 8%. Over the weekend it transpired that Harmony Gold was putting the final touches to a full takeover bid for Gold Fields. The formal announcement was made this morning, 9.00 am South African time, at a briefing in Sandton by Harmony chief executive, Bernard Swanepoel. This is an all-paper offer – 1.275 Harmony shares for each Gold Fields share. Harmony said the offer comprised a premium of roughly 30% above the average Gold Fields share price over the past 30 days. That’s normal in this kind of takeover bid. In round figures, Harmony is offering a premium of US$2.4bn, taking the full offer for Gold Fields to $8.1bn dollars. Among the many, many details to consider, Russia’s Norilsk, which acquired 20% of Gold Fields in March, has given Harmony an irrevocable agreement that it will back the Harmony bid.
MONEYWEB: In other words, it’s votes are in the Harmony bag?
BARRY SERGEANT: Yes, it’s a very unusual situation.
MONEYWEB: So they got 20% before they start, really. And they only need 50%.
BARRY SERGEANT: Exactly. This highly unusual situation is only one of the many indicators that Harmony’s bid is nothing less than hostile. A great battle is likely to be waged in the days and weeks ahead and, yes, Gold Fields announced today that it had hired Goldman Sachs – and also another big Wall Street name, JP Morgan.
MONEYWEB: So no more “no comments” there. Bernard Swanepoel joins us now, chief executive of Harmony. Bernard, how do you calculate – just to let people understand how these kind of things work – the offer that you would make here? You are going to be giving 1.275 Harmony shares for each one Gold Fields share. But how do you come to that number?
BERNARD SWANEPOEL: For us it was looking at the Gold Fields assets and seeing what additional value we could unlock through implementing the things we do. That comes to a monetary amount, and then of course we have to find a way in which we can load that into an upfront premium for existing Gold Fields shareholders. That’s very normal in a transaction where you try and take control of a company.
MONEYWEB: But why 1.275? Why not 2, why not half?
BERNARD SWANEPOEL: The share prices were really almost a parity for a long time, for months. If Harmony was R70, Gold Fields was R70. And so the 27.5% was really a 27, 25 to 30% premium. So that‘s where the ratio originally came from. It was really how the share prices were seen in the market over quite an extended period of time, Alec.
MONEYWEB: This morning in the presentation, you said you were interested in Gold Fields assets for some time, but that the bid was really sparked by Gold Fields’ decision to itself to a takeover bid of a North American listed company called Iamgold. What is it about the takeover prospect that got you interested?
BERNARD SWANEPOEL: You know, we looked at the transaction and thought that it was a bad for South Africa, and bad for the South African assets of Gold Fields. But it was specifically bad in the value leakage. Gold Fields were proposing to give away all of their cash, all of the growth exploration, and all their international assets at what is generally accepted to have been a cheap price. When there is a such a value leakage, then obviously you would expect some shareholders to not be particularly happy with that. We saw a significant value leakage in their proposal, and then we looked at our way of operating mines, and we believe there’s a value creation. So we thought what we could put to Gold Fields shareholders was a better option on two counts – preventing value leakage and creating value.
MONEYWEB: So, in your opinion, they’ve done a bad deal and this presents an opportunity?
BERNARD SWANEPOEL: That’s really how we view that.
MONEYWEB: The reaction from the other side, from Ian Cockerill, who I did manage to have a chat with this afternoon, said that this is an opportunistic deal. It is senseless because you’ve got a smaller company, with lower-grade assets, lower quality assets, wanting to buy out a company with much better assets, in his opinion, at a price that he thinks is not realistic. Why do you think that shareholders of Gold Fields should accept the bid you’ve put on the table?
BERNARD SWANEPOEL: I think there are a few reasons. The upfront one of course is the premium, you know, and obviously we are indicting to Gold Fields shareholders that the management team of Harmony is prepared to pay more than what the current share price reflects, in order to unlock the value. And we would invite them to join this new, better company. I think it becomes quite an interesting and good equity story, you know. If you put the two companies together, you may not take some asses and go and live in Denver or whatever, but you certainly create a world-class mining company, biggest in terms of production ounces, second-biggest potentially in terms of market cap. And you really will become a truly integrated mining company from exploration all the way through to beneficiation. We think that’s a compelling story. You don’t constrain this company in the sense that you have given most of its cash-generative assets to another board to control. You don’t constrain this company for its growth to the SADC environment or region. And, really, you don’t try and abandon South African assets prematurely.
MONEYWEB: The response to that, from Ian Cockerill, is they are going to be investing R10bn in developing the South African assets over the next few years. It doesn’t sound like they’re abandoning them.
BERNARD SWANEPOEL: I think if one goes through what has been put into public domain before, and looks at the analysts’ conclusion, if you look at the behaviour of the company over the last few quarters, there’s been very little evidence of cost reductions or trying to implement new work practices. And really, most the of the effort has gone into raising the grade, which is not necessarily a bad thing, but cutting back on development and cutting back on capital. So sometimes one’s actions speak so loud that you can’t hear the words.
MONEYWEB: You talked about “living in Denver”. Are you telling us that the Gold Fields management team are relocating?
BERNARD SWANEPOEL: No, I think the Iamgold transaction was pretty clear, in that some of the management of Gold Fields will actually end up running the international company. Chris Thompson, the current non-executive chairman, would end up as the chief executive of that, and then the guy heading up the exploration division would also end up there. So it really splits their current management team almost perfectly in half, and in there lies another duplication. So the same assets really now end up in two corporate structures. Investors get two entry points there. So a holding-company discount potential. Alec, I’m much more comfortable explaining the positive side of the Harmony bid, but it’s not difficult to be critical of the Iamgold transaction.
MONEYWEB: Talking about the positive side of the bid, better management is clearly one of the issue that you’re going to be driving, that have a better management team than the Gold Fields team – and that would be evident by your claim that you can cut 15% of Gold Fields costs. Is that the number that you’re sticking to, 15%, or might it even be higher?
BERNARD SWANEPOEL: I think our track record may indicate that we’ve done better than that from time to time. You know, one has to make these bids on public domain information, you have to go on what you see, looking in and reading analysts’ reports and reading annual reports of the company. We certainly believe that the 15% is achievable without this becoming a deep cut into numbers of people working on the mines. I can see that some of the unions, especially Solidarity, have obviously got themselves confused about what this may mean in terms of job creation.
MONEYWEB: How so?
BERNARD SWANEPOEL: They’ve put out a press release saying that they hear that this will result in 7,000 job losses. They certainly could never have heard that from Harmony, because we are extremely comfortable that we can achieve the 15% without having to cut deeply into, as I say, the blue-collar workers. Of course, when you put two companies together, one with lots of levels of hierarchy, one with a head office and all sorts of other positions which don’t exist in Harmony, there will be some integration and some senior job losses.
MONEYWEB: Ian Cockerill, for instance?
BERNARD SWANEPOEL: Nothing compared to the numbers as put out by the unions.
MONEYWEB: You say job losses, Ian Cockerill – he ain”t got a job with you?
BERNARD SWANEPOEL: You know, as I indicated, that was one of the few questions I was asked by Ian over the weekend – what are the plans for management? And I obviously had to honestly state that we at Harmony have got a flat-structure approach. We love the managers in the mines to be the guys who take the decisions of how to run the mines, and that results in less people being required in the head office. But if his board were to recommend this transaction, then him and me can sit and work out the details of how to integrate the team.
MONEYWEB: That sounds like a bit of a bribe, Bernard?
BERNARD SWANEPOEL: I think it’s just common sense that, if you want to be part of the future, then you have to join the future.
MONEYWEB: But the chances of that happening, given what you said at your presentation today, given what Ian Cockerill has said to us here at Moneyweb this afternoon, seem pretty slim?
BERNARD SWANEPOEL: Alec, it’s difficult for me to assess. When I spoke to Ian originally, he rejected it outright. But then later, obviously on the advice of his advisers, he said that he would take it to his board, which I thought was the proper thing to do in the first place. I am under the impression, last night, the last communication I had from him via e-mail was that as soon as they’ve got enough information, he will take it to his board. I am not sure whether he’s called the board meeting yet. But I keep on being confronted [with the statement] that he has rejected it and called it hostile. I don’t think that can be his board’s view yet. It may be his personal view which he is expressing at this stage.
MONEYWEB: Well, I will enlighten you – which is unusual from where you are sitting. But the board started at 5:00 pm this afternoon, and we are hoping to speak with Ian Cockerill. He is hoping to have the board meeting finished or to pop out, to tell us what those conclusions were at about 6:50 pm this evening. The ace in a hole for you is the Russians. They’ve already given you the irrevocable, in other words that they are going to support you in this – but what conditions have they attached to that?
BERNARD SWANEPOEL: There are really no conditions which would imply some sort of deal that isn’t fully extended to all of the shareholders. One of the requirements of a transaction like this is that you can’t have side deals with one shareholder which isn’t extended to all shareholders. So part of our filings is a complete disclosure of the irrevocable undertaking, and any irrevocable has always got clauses that this isn’t open-ended for years and years. It’s for a fixed period of six months. So there are normal terms that are very typical to an irrevocable. But here are no side deals or special favours or anything of the sort, Alec.
MONEYWEB: But one of the keys is that the Iamgold, the North American transaction by Gold Fields, may not go ahead?
BERNARD SWANEPOEL: That is a condition we put forward to the Gold Fields shareholders, you know, and we therefore also procured from Norilsk an undertaking that they would vote against that. You can imagine, that wasn’t too difficult because they were already very anti that transaction. But that’s a condition applicable to the whole transaction and not necessarily only the Norilsk irrevocable undertaking to support us.
MONEYWEB: Bernard, in the initial parts of this programme, we were talking with Arthur Buchner, who watches very closely the way that the share prices react. And that gives you an indication of whether the deal will go through or not. Now, to begin with, very shortly after your presentation this morning, there was a big thumbs-up – the Gold Fields price in fact traded at a premium to the bid offer. But towards the latter part of the day, and particularly after the Americans came into the market, it has not gone to a substantial discount to the offer, which would suggest that they are giving it the thumbs-down. If this kind of relationship continues, would you consider raising your bid?
BERNARD SWANEPOEL: Alec, I really am prevented from even commenting on what we may or may not do in terms of future pricing. I think we certainly always had an expectation that this transaction would be very well received in South Africa and Europe. And, remember, in North America a lot of people have been making good money out of the previously proposed transaction on the Iamgold side. I personally am completely unsurprised by the behaviour. I think there’s a healthy premium left and typically, I think most market commentators will agree that you wait four, five days to see how the market judges such an offer. Is it substantial, is it real, is there a real chance of success? A huge amount of detail, like 70 pages worth, was dumped on everybody today, and I think I back the market to come to a logical conclusion in a few days time.
MONEYWEB: You’ve landed a few punches the first day, you’ve had a few hits back, particularly from the market, in the first day. But maybe around four and five is where the telling is going to be. How long does this whole contest continue for?
BERNARD SWANEPOEL: Well, we obviously hope that we would be able to convince the Gold Fields board at some point that this transaction indicates a significant value uplift for the shareholders. That process will continue and hopefully the board will at some stage engage us on that. There is the 30-day sort of point, where shareholders will get a chance to vote for the first time with their feet and their money. Some shareholders may accept the Harmony offer at that point in time and lock in the premium. And obviously if we achieve a significant percentage at that point – we know how the Russians will vote – well, then the Iamgold transaction may go away completely. Then it’s a different ball game.
MONEYWEB: The thing is, as far as the Russians are concerned, you won’t get their 20% shareholding unless the Iamgold transaction disappears?
BERNARD SWANEPOEL: Their irrevocable is subject to all the conditions of the transaction. They can’t and won’t offer their shares into the quick-acceptance offer, that’s correct.
MONEYWEB: Bernard, what happens if you get say 34, 35, 38%? Would you then hold on to those shares? Would you make sure that it happens, or do you have an out?
BERNARD SWANEPOEL: No, I think if we get into a stake of significant influence we would obviously try to have a proportionate say in how the company gets run, Alec. There are so many different scenarios. Obviously, before you can go over 34.5%, you actually need to get Competition Commission approval to go to 100%. So if you are in that position, then you obviously have to evaluate whether you build up your stake over a period of time, probably something along [the lines of] the Iscor recent transaction. If you get a stake which is less significant than that, then one may actually crystallise that into cash. There are so many scenarios, it’s almost impossible to speak to any one of them.
MONEYWEB: Fully understood. But are you in this for the long haul – in other words, if you don’t get 50%, are you going to withdraw completely or is it too juicy a target to leave as it is?
BERNARD SWANEPOEL: Alec, it’s very tempting to say “it’s too juicy a target to leave”. But I must tell you we have covered all the bases. We have put up what we believe will turn out to be a knock-out premium in the end. We put forward a value proposition which, except for the Iamgold shareholders, we think most shareholders are going to buy into, as we get around to explain that. And we really back ourselves to succeed. And you would expect me to say nothing other than that.
MONEYWEB: And your board fully behind this – 100% support?
BERNARD SWANEPOEL: Our board is very supportive of that. We’ve got one director, Lord Robin Renwick, who is also a senior vice-president of JP Morgan, which has been engaged to defend Gold Fields. He has tendered his resignation, simply to prevent a conflict situation. We respect that and have accepted that. Each one of our directors has been in support of this – and very importantly, of course, our single biggest shareholder has supported this. So we’ve got Gold Fields’ biggest shareholder and Harmony’s biggest shareholder in support of this transaction.
MONEYWEB: Bernard, have you had any discussions whatsoever with the black economic empowerment partner of the other side, Mvelaphanda?
BERNARD SWANEPOEL: The two chairmen, as you would expect, being Patrice Motsepe and Tokyo Sexwale, did exchange some views, I know, on Sunday afternoon or evening. It was really, as you would expect, two people who in their private lives are also friends, bringing each other up to speed with where it is. In the end, I expect Mvelaphanda to wait to see whether they believe that the Harmony transaction will create value on the South African assets of Gold Fields, because that is where their exposure is. If we can deliver on our promises, then Mvelaphanda’s case is even more spectacular than the normal Gold Fields shareholder, because they are exposed to the South African assets only.
MONEYWEB: Bernard Swanepoel, Harmony’s chief executive, a man who has had a long, hard day, and we really appreciate spending 20 minutes or so with him to outline the transaction of the year, unquestionably.