LEONHARD FOEGER/Reuters
Here's a rare deal structure: the proposed $1.5-billion (U.S.) merger between Alamos Gold Inc. and AuRico Gold Inc. contains the promise of a private placement, no matter what happens to their tie-up.
Share-for-share mergers, like this one, are usually pretty straightforward. Two companies come together, and the buyer either offers some of its own stock, instead of paying cash, or the deal is sold as a 'merger of equals' and shareholders of both firms get stock in a 'new' company. The latter is happening here – though, funnily enough, that 'new' company will be known as Alamos.
However, this deal comes with an extra wrinkle. Alamos has also promised to buy 27.9 million AuRico shares for $83.3-million, giving it a 9.9 per cent stake, even if the deal falls through.
It may seem like a small footnote to a much larger merger, but AuRico chief executive officer Scott Perry referred to it as an "essential part of the deal" on a conference call – which has everyone trying to understand the rationale.
Mr. Perry argued the investment is an important form of financing for his company, which has some debt woes, in a tough market for miners. Because industry share prices are still so low, it's hard for many companies to raise equity.
With guaranteed money in hand, AuRico will be able to fund its Lynn Lake project in Manitoba as well as some of its exploration programs in Canada and Mexico. Mr. Perry was also quick to note that this is a "cost-effective" form of financing because the shares were issued at market price, and there were no underwriting or legal fees involved.
Analysts on the call didn't disagree with Mr. Perry's assertion, but they kept asking if the financing was somehow designed to deter a rival bidder. Because Alamos now has a nearly 10 per cent ownership, for instance, it will have extra weight in any shareholder vote.
Mr. Perry more or less tried to skirt to the issue, arguing that "it will not preclude anyone from putting forward a superior proposal," but Alamos CEO John McCluskey seemed more willing to address the questions.
"Clearly the objective of the private placement is to assist in helping the transaction close," he said, adding, "the biggest threat to the transaction not closing is an interloper coming in."
Although he didn't reveal much more than that, it was pretty clear that the financing is designed to at least deter some rival bidders. It might work, but you can bet some rivals have to at least consider taking a run at one, if not both, of these companies, considering the proposed merger wasn't priced at a premium to current market values.
Tim Kiladze