Randgold agrees no-premium merger with Canada's Barrick Gold

UK company's shareholders will receive 6.128 shares in what will be called Barrick Group for each of their Randgold shares and consequently therefore own 33.4% of an enlarged New York- and Toronto-traded group that will be delisted from London.

The price valued Randgold broadly in line with the 20-day volume weighted average price at 4,935p per share before a $2 per share dividend to which Randgold shareholders will be entitled for the 2018 financial year. If the merger is effected, the combined group intends to grow its dividend from the 2018 Barrick level.

After completion of the deal, which is expected in the first quarter of next year if approved by shareholders at forthcoming extraordinary general meetings, Randgold chief executive Mark Bristow and his chief financial officer Graham Shuttleworth will retain their roles in the new Barrick, where John Thornton will remain executive chairman.

Recommending their shareholders approve the deal, directors of both companies said they believe the merger will create a company with "the greatest concentration of tier one gold assets in the industry, the lowest total cash cost position among senior gold peers, and a diversified asset portfolio positioned for growth in many of the world's most prolific gold districts", not to mention a copper business that produced 413m pounds of the metal last year.

The proposed deal comes eight years after Barrick spun off its African assets as African Barrick Gold, which later changed its name to Acacia Mining and in which Barrick still holds a 63.9% stake.

Based on the 2017 financial results for both companies, the new Barrick Group would have generated revenue of roughly $9.7bn and adjusted EBITDA of close to $4.7bn.

Directors plan to invest in the portfolio gold and other strategic assets with an emphasis on organic growth and buying land in many of the world's most prolific districts, selling off non-core assets over time and looking to "maximize the long-term value" of the copper business. Analysts said assets could be sold off piecemeal or into a 'spin-co'.

"Our industry has been criticised for its short-term focus, undisciplined growth and poor returns on invested capital," Bristow said. "The merged company will be very different. Its goal will be to deliver sector leading returns, and in order to achieve this, we will need to take a very critical view of our asset base and how we run our business, and be prepared to make tough decisions.

"By employing a strategy similar to the one that proved very successful at Randgold, but on a larger scale, the new Barrick Group will leverage some of the world's best mines and talent to create real value for all stakeholders."

Thornton added that the main measure of success for the new group being "the returns we generate and not the number of ounces we produce".

He added: "There are no premiums in the merger because we strongly believe in the opportunity to add significant value for our shareholders from the disciplined management of our combined asset base and a focus on truly profitable growth."

From an anti-trust perspective, the only jurisdiction required is South Africa, which includes a public interest test.

Barrick will pay a break fee to Randgold of $300m if Barrick shareholders do not approve the deal or if a competing offer is made for Barrick.

MARKET REACTION & ANALYSIS

Randgold shares, which earlier this month fell to a two-and-a-half year low, were up almost 4% to 5,116p on Monday morning.

“The proposed merger, instead of one being based on merit, strength and strategic integration, is more akin to the proverbial ‘two drunks supporting each other at closing time’,” said Panmure Gordon analyst Kieron Hodgson.

But Shore Capital's Yuen Low said "Oh no! London could be waving good-bye to long-time market favourite Randgold."

He added: "Given the lack of similar alternatives to Randgold in London, and given that not all Randgold shareholders will be able to hold non-London equities, we suggest that Randgold shareholders should hold out for a ‘golden goodbye’ premium to make up for their inability to benefit in future upside.

"For those who are able to continue to hold, we see Randgold CEO Mark Bristow becoming president and CEO post-transaction as a good thing. However, we are concerned that incumbent executive chairman John Thornton retains his ‘executive’ title."

He also said the plan is to grow the dividend from the 2018 Barrick level, "which is not quite as appealing to us as the Randgold level".

Given Randgold’s successes in its negotiations with several African jurisdictions, Credit Suisse said the deal "may give Barrick the needed assistance to move forward with its ongoing struggles with Acacia", which has had problems with Tanzania's government.

From Randgold’s perspective, the deal diversifies exposure away from high-risk African markets and towards Barrick’s more stable North American assets, said Analyst Nicholas Hyett at Hargreaves Lansdown.

"Given recent headwinds that’s welcome," Hyett said. "The regulatory shakeup in the Democratic Republic of Congo has dented the share price and Randgold has also struggled to find new projects of scale, potentially holding up dividend growth in the years ahead. It’s also worth noting that Randgold has been trading at a premium to Barrick in recent weeks, so the deal does favour the smaller partner."

However, Hyett said the deal is an interesting one for Barrick, eight years after the Acacia spin-off that was seen as a move to de-risk the portoflio. "Back then the group argued that the London Stock Exchange delivered a better valuation for African assets. Given that fact, the decision to scrap the London listing is perhaps a bit of a surprise.”

Analysts at RBC Capital Markets said it had felt Randgold's valuation was "too full given the challenges faced", including increased risk across the group’s African portfolio, slowing production momentum due to a lack of new projects and the impacts from this on dividend growth. But it noted that Randgold traded at a 1.35-times premium to net asset value versus Barrick on 1.05 times, while Randgold's enterprise value was 7.9 times EBITDA to Barrick's 6.7.

"Today's transaction removes these issues and dramatically changes the outlook for Randgold, albeit with a 'New Barrick' vehicle that will not be London listed... Despite the potential overhang of the removal of the London listing causing selling pressure from European holders, we see the news as overall positive for the group due to the higher-quality nature of the assets in Barrick."

Noting the South African public interest test, Olivetree Research did not anticipate this being a problem given the low level of operations of either company in South Africa, but said it does introduce probably the only element of risk in the transaction.