Bay Street in Toronto.TIM FRASER/The Globe and Mail
There was a time when nothing was better than getting a hostile bid for your mining company shares. This is not that time.
Hostile acquisitions are creatures of the extremes of the mining cycle. There are now two big ones outstanding in Canada, and there are likely going to be more. And it's not going to be very much fun to be the target.
In better times, getting put into play is like winning a lottery. The hostile acquirer invariably starts a bidding war that ends in a top-dollar sale. Exuberant chief executives decide they have to have something and can't stop raising their offers. Shareholders of Alcan Inc., Inco and Falconbridge Ltd. probably still haven't spent their winnings, years after the last round of such sales. Most of the CEOs who overpaid for those companies ended up pulling the ripcord on their golden parachutes.
Now, at the bottom of the cycle, hostile offers usually result from a disconnect about value. Mining shares have plunged, and target boards don't want to think about selling at such low prices.
Frustrated acquirers give up on negotiations and send their bid directly to shareholders.
Today, being put into play likely means a sale at a price that the target companies would rather not think about. For Osisko Mining Corp., facing a $2.6-billion bid from Goldcorp Inc., and Augusta Resource Corp. now staring down a $540-million hostile offer from HudBay Minerals Inc., few white knights are lurking in the background. Bidding wars are unlikely and the expectation from bankers and analysts is simply that the hunted will do well to extract anything more than the standard bump of a few per cent from the hostile bidder to see a transaction through.
Targets can grouse about insulting and opportunistic offers that undervalue their assets, and all the other rhetoric that gets trotted out at times like this, in press releases and proxy circulars.
Unfortunately for Osisko and Augusta, Canadian shareholders rarely say no when there is a passable premium on the table. Hedge funds that step in to profit from takeover bids almost never do so.
Back-of-the-envelope calculations based on trading volume suggest that as much as a quarter of Osisko's shares now belong to short-term traders who play takeover battles. At Augusta, the number may be approaching 10 per cent.
Add to that a limited range of alternative bidders, and plenty of targets, and it's a recipe for a lot of one-and-done bids. For those companies that can buy, why get into a costly battle for an asset when there is more than enough easy prey available?
Laurentian Bank Securities analyst Christopher Chang estimates that Augusta, which is promoting an Arizona copper project called Rosemont, is probably worth something like a $1 more than the $2.96 at which HudBay's offer was initially valued. But that probably won't matter.
"While we believe Rosemont is an attractive asset with very robust economics, the number of white knights in a position to trump HudBay's proposal is relatively limited," he wrote. OZ Minerals and Teck "would be among the few companies that have the financial capacity to make a competing offer."
It's not just the divergence in value expectations that will drive a boom in hostile takeover bids. It is the difference in access to capital. Smaller companies, even those with a promising asset, have a tough time accessing capital markets after a year in which the S&P/TSX materials index fell 30 per cent.
Meantime, companies like Hudbay and Goldcorp have no trouble getting money. Goldcorp's financiers at Bank of Nova Scotia have set up a $1.25-billion line of credit for Goldcorp. At Augusta, the priority is cash to build the Rosemont mine. HudBay just raised $173-million in a share sale and doubled its line of credit, and reckons it can fund the mine without having to raise any further money.
Once a bid is out in Canada, a company can be swallowed in a matter of weeks. Osisko is playing a smart delaying game to buy time to find another offer. A court action in Quebec has won the company another few weeks at minimum. But it probably won't matter in the end.
Investors are saying the same thing that bankers quietly do – there is not much hope of someone willing to go up against Goldcorp. And so Osisko shares fetch about 4 per cent more than the value of Goldcorp's cash and stock bid.
Of course, Osisko investors could say no to Goldcorp. History says they won't.