It is the mystery of the two cents.
When Newmont Mining Corp. said on Monday it will buy Goldcorp Inc. for about $10-billion, swapping its stock for Goldcorp’s, it said it would add 2 US cents per share in cash to the transaction. The tiny little sweetener will cost Newmont just US$17-million.
Why even bother?
Robert Willens, a long-time U.S. securities analyst who specializes in matters of taxation, seems to have the answer. Newmont is creating a sizable but little-understood tax benefit for Goldcorp Inc.'s U.S. shareholders that effectively makes its offer more valuable than it appears.
The companies have not addressed the matter. Newmont declined to comment for this story and Goldcorp did not respond to a request.
But Mr. Willens told his clients on Tuesday that the structure of the deal makes it taxable for Goldcorp’s U.S. and Canadian shareholders. Usually, companies do everything to avoid that.
But given how far Goldcorp stock has fallen – down 75 per cent from 2012, and 30 per cent in the past year – virtually no Goldcorp shareholders will have any capital gains to tax. Instead, Newmont’s decision to create a taxable transaction will create capital losses – and Goldcorp shareholders will be able to use those losses to save on their taxes if they sell a different, profitable holding.
Here’s how the 2 US cents come in.
A company’s shareholders give up their stock in a merger. But, generally, if they receive stock in the acquiring company instead of cash as their payment, they do not have to pay taxes on any gains at the time of the deal.
That only works, however, if the entire payment is in stock. Newmont is offering 0.328 of a share for every Goldcorp share, which is worth US$10.35 at Wednesday’s closing price, plus 2 US cents a share.
That cash disqualifies the merger from the tax benefit in the United States, Mr. Willens said, and that seems bad at first glance.
The answer comes when you look at Goldcorp’s price history. Some stockholders may have bought Goldcorp at its lowest levels, and show a gain of perhaps 10 per cent or so. Many more shareholders, however, are showing a loss on their Goldcorp holdings. The NYSE-listed shares traded at US$15 a year ago, between US$20 and US$30 five years ago, and in the high US$40s in 2012.
All those shareholders who bought high and now must hand over their shares to Newmont will have capital losses instead of capital gains. Thanks to the two cents, those losses can be used to offset capital gains on the sale of other stocks in an investor’s portfolio, thereby reducing the tax bill.
Were it not for this manoeuvre, a Goldcorp shareholder who wanted to obtain those capital losses would have to sell their Newmont shares. This benefits Newmont, because the former Goldcorp stockholders have one fewer incentive to sell their Newmont shares.
Canadian shareholders will have the same benefit, but the 2 US cents wasn’t necessary to help them. Shareholders who get U.S. stock for their Canadian shares typically get taxed even if no cash is involved. A U.S. company can structure a deal in other ways to create the tax savings, but Newmont and Goldcorp are not doing that, either, Mr. Willens says. So that makes the merger taxable for Canadians, as well.
The U.S. long-term capital gains rates are 15 per cent for most taxpayers, with a 20-per-cent rate for wealthier taxpayers, such as more than US$470,700 in income for a married couple. (It’s zero for those at the very bottom of the income charts.)
Every dollar of losses that can offset taxable income creates a benefit of 15 cents for U.S. taxpayers who pay 15 per cent tax on their income. So a Goldcorp share acquired for US$20 and surrendered to Newmont for US$10 creates a US$10 loss worth US$1.50 at the 15-per-cent rate.
In Canada, taxpayers include 50 per cent of a capital gain in their income, which is then taxed at their individual rate. And they can use 50 per cent of a capital loss to offset gains. So 50 per cent of a $10 capital loss is worth $1.45 for shareholders taxed at a rate of 29 per cent.