Franco-Nevada has agreed to buy rival royalty company Gold Wheaton for $830-million, an amount immediately disparaged as "grossly inadequate" by a major Gold Wheaton investor.
The deal is happening as Gold Wheaton's business plan is squeezed. Both Gold Wheaton and Franco-Nevada are in the mining royalty business, where they own assets that deliver a percentage of cash from operating mines, rather than finding, building or operating their own mines.
But Vancouver-based Gold Wheaton - created just 2½ years ago - hasn't been able to snatch additional royalty deals to build up on its existing foundation.
Adding Gold Wheaton to its stable will immediately benefit Franco-Nevada, the company told investors and analysts on Monday. It's this fact, according to Gold Wheaton investor Sentry Select Capital, that indicates Gold Wheaton is "leaving money on the table."
"It is grossly inadequate, from a financial point of view," said Sandy McIntyre, chief investment officer of Sentry Select. It is the second-largest holder of Gold Wheaton shares with a stake of about 17 per cent.
He said Sentry is reserving judgment on whether to vote against the deal but noted: "There's room for the deal to be sweetened."
Franco-Nevada, based in Toronto, is paying $5.20 a share for Gold Wheaton, 23 per cent more than Gold Wheaton's recent trading level. Gold Wheaton shares jumped 14 per cent on Monday to $4.99 from $4.38 at Friday's close. Franco-Nevada said 60 per cent of the deal will be funded by its stock and 40 per cent in cash, or $2.08 a share for Gold Wheaton.
Investors in Franco-Nevada appeared unimpressed as shares of the company fell 4 per cent.
The deal, which is set to close in March, needs the approval of two-thirds of voting Gold Wheaton shareholders and a majority of the minority shareholders.
Speaking on a conference call on Monday, Gold Wheaton chief executive officer David Cohen said it had become "very apparent" that it made more sense to sell to Franco-Nevada than to forge forward alone. The company didn't have enough money to pursue deals to acquire royalties on gold, which, Mr. Cohen said, have become more difficult to close and more expensive.
Combined with Franco-Nevada, there is "tremendous growth potential," Mr. Cohen said.
Gold Wheaton signed its main royalty deal in mid-2008 and went public in March, 2009, at $2.50 a share. Among Gold Wheaton's backers are two Vancouver heavyweights, Francesco Aquilini, a real estate titan and owner of the Canucks, and Frank Giustra, a mining veteran and, more recently, philanthropist and friend of Bill Clinton. Both Mr. Aquilini and Mr. Giustra have been directors of Gold Wheaton since it was created.
For Franco-Nevada - with a market capitalization of $3.6-billion on the Toronto Stock Exchange - the deal "materially increases" its exposure to gold prices, according to David Harquail, company CEO. He described Gold Wheaton's primary holding as a "cornerstone asset." The royalty on Quadra FNX's mine in Sudbury, Ont., was purchased for $400-million in June, 2008, and delivered net revenue of $31-million in the first nine months of this year.
In a presentation to investors on Monday, Franco-Nevada said it still has a "strong platform for growth." At Sept. 30, the company had $785-million (U.S.) available for acquisitions. When this deal closes, the company estimates it will have $345-million on hand for deals. The company has no debt and indicated it can finance deals through cash on hand and bank loans.
Franco-Nevada is leveraging its stock in the takeover. According to analyst Greg Barnes of TD Securities, Franco-Nevada stock trades at about 15 times estimated 2011 earnings before interest, taxes, depreciation and amortization, compared with the approximately seven times EBITDA is paying for Gold Wheaton.
Still, Mr. Barnes noted that Franco-Nevada does take on some "increased execution risk" related to royalty assets in First Uranium properties in South Africa that Gold Wheaton owns. Mr. Harquail acknowledged that there is some risk. "The market is absolutely right," he told investors and analysts on a conference call on Monday. "The jury has been out in terms of whether these things would perform or not."
The prelude to the deal came a month ago, on Nov. 10, when Quadra FNX Mining Ltd. declared that its one-third stake in Gold Wheaton was a non-core asset. Franco-Nevada is paying Quadra FNX $4.65 a share for its Gold Wheaton stock, a deal struck last Friday. Franco-Nevada had previously already owned about 2.5 per cent of Gold Wheaton.
While Franco-Nevada had eyed the company for some time, the deal happened fast after the Friday acquisitions of the Quadra stake. "A lot of the things we've been working on for over a year and a half fell into place really quickly," Mr. Harquail said.
On the Quadra FNX side, Paul Blythe, CEO of the company, said the sale of its Gold Wheaton stake - which drummed up $263-million for Quadra - will help develop proposed projects in Chile and Sudbury.