By Marcus Falck, Carlos Asorey, Oscar Kock and Steven Skomra (SSE & Georgetown University) - Date: 06/03/2019
Overview of the deal
Acquirer: Barrick Gold Corporation (NYSE: GOLD) - Advisors: NA
Target: Newmont Mining Corporation (NYSE: NEM) - Advisors: NA
Estimated value: $17.85bn
Announcement date: Proposed February 25, 2019
Barrick Gold’s announcement of a proposed acquisition of Newmont Mining on February 25, 2019 was an initial surprise to investors as the announcement came just a few months after Barrick completed its $6bn acquisition of Randgold Corporation. The proposed unsolicited, hostile bid offers $17.85bn for Newmont in an all share, nil premium transaction of 2.5694 Barrick shares for each outstanding Newmont share. This values Newmont at approximately $33.50 per share, which is below its current trading price. If completed, the combined entity would be valued at over $42bn in market cap, hold 141 million ounces of total gold reserves, and have annual operating cash flows of about $5bn making it a gold mining giant.
Following completion, Barrick shareholders would hold 55.9% of the merged company while Newmont shareholders would hold approximately 44.1%. There could be significant investor backing behind the acquisition since the top 20 shareholders in Barrick, who hold a combined 55% stake, also hold a combined 91% stake in Newmont. Barrick’s CEO maintains that the focus of the acquisition is to aim to eliminate overlapping operational costs in both companies’ gold mines located in Nevada by combining tasks such as ore transportation and processing. Barrick hopes the move could help prevent Newmont’s agreement to acquire Goldcorp Inc., which if completed would put Newmont slightly ahead of Barrick in production output. While there have been talks of these companies merging in the past, management teams have historically been unable to strike a deal.
"The combination of Barrick and Newmont will create what is clearly the world's best gold company, with the largest portfolio of Tier One gold assets and the highest level of free cash flow to drive future growth and support sustainable shareholder returns, run by a management team with an unparalleled record of delivering value." - Mark Bristow, Barrick CEO
Company Details (Johnson and Johnson)
- Founded in 1983, headquartered in Toronto, Ontario, Canada
- President and CEO: Mark Bristow
- Number of employees: 18,421
- Market Cap: $21.86bn EV: $27.82bn
- LTM Revenue: $7.24bn - LTM EBITDA: $3.05bn
- LTM EV/Revenue: 3.84x - LTM EV/EBITDA: 9.12x
Barrick Gold Corporation is the largest gold mining company in the world with operations in over 15 different countries including the US, South America, Africa, and Canada.
Company Details (Auris Health)
- Founded in 1921, headquartered in Greenwood Village, Colorado, USA.
- President and CEO: Gary Goldberg
- Number of employees: 12,569
- Market Cap: $18.20bn - EV: $19.81bn
- LTM Revenue: $7.25bn - LTM EBITDA: $2.31bn
- LTM EV/Revenue: 2.73x - LTM EV/EBITDA: 8.58x
Newmont Mining Corporation is a mining company focused on the production and exploration for gold and copper. The company primarily produces gold with operations throughout North America, South America, Australia, and Africa.
Projections and Assumptions
Short term consequences
Rumors of a combined Barrick and Newmont have been circulating for years, including as recently as 2014. What has occurred is instead a heavy rivalry of who is the largest; the Barrick/Randgold merger appointed them the largest in the industry, however only lasting four months until Newmont/Goldcorp stole that position. Amidst a general consolidation of the industry, a natural consequence is increased M&A activity, and this is proof of just that. The merged entity of Barrick and Newmont would by far surpass industry peers, with the NewCo reaching a market capitalization of $42bn; four times greater than the second largest producer of gold, Newcrest.
A merger between the two gold conglomerates will bring administrative difficulties initially; as it will force Newmont to discontinue its process of merging with Goldcorp. As stipulated by the proposal from Barrick, Newmont will have to terminate its intents of becoming a unified entity with Goldcorp, though Barrick will fully cover the $650m breakup fee that this action implies. Barrick’s motive of separating Goldcorp, thus removing the possibility of a NewCo consisting of Barrick/Randgold/Newmont/Goldcorp stems from Barrick’s strategy of centering the most profitable mines in favorable mining jurisdictions, so called Tier One assets. Barrick has five Tier One assets, Newmont has three and a potential fourth, but Goldcorp has none. Hence, the Barrick-proposed combination would create the industry’s premier gold investment vehicle, with improved capacity for free cash flow generation through its Tier One gold assets, without Goldcorp’s involvement.
Investors reacted immediately with caution to the proposed transaction: Barrick shares had declined 3.4% as of Thursday the 28th – the deal was announced early Monday the 25th – while Newmont dropped 6.3% during the same period. This is in large part due to the no-premium merger that was offered, and that at a discount – Newmont was trading at 5.4% above Barrick’s all-share offer. This value discrepancy leads investors to believe that Barrick will provide a higher bid for Newmont in the near future, or if not, that the deal might not go through. The Newmont Goldcorp entity that was still pending approval announced they would offer the highest annual dividend among senior gold producers, targeting $0.56 per share. In this new proposal, this value creation for shareholders will still hold. The NewCo intends to match Newmont’s targeted annual dividend, and based on the proposed exchange ratio, will represent $0.22 per Barrick share; an increase of 37.5% from their current annual dividend.
Long term upsides
Barrick’s profit-oriented approach that originates from them focusing on Tier One assets also presents an opportunity for divestments. An approximate of $7bn worth of assets embedded in the separate entities’ portfolio could be freed up as a result of the merger. Coincidentally, this amount resembles the pre-tax NPV of over $7bn of real synergies that Barrick specifies in their proposal as synergies directly connected to the merger. These expected annual synergies are 7.5 times larger than that of the Newmont/Goldcorp merger.
The long-run outlook of this transaction, and the evaluation of its success, depends heavily on the development of the price of gold. For investors that aim to diversify their portfolio, the demand for gold can moreover increase in the long-term as traditional red flags of recession unfolds around the globe; like the flattening US yield curve and low US unemployment rate. In the past six months, we have already seen an increase in the price of gold by 8%. The price of gold is still volatile though, experiencing a surge in January and February 2019, to now be at the same level once again as in the beginning of 2019. If gold prices continue to decline, we can expect further M&A activity in the gold industry; but rather from smaller actors embarking on profitability and economies of scale. With the Barrick/Newmont entity controlling the world’s top tier assets, located in favorable jurisdictions, it is important for smaller actors to have a diversified portfolio of both high and low risk mines in a diverse set of geographical locations – something that further industry consolidation could provide.
Risks and Uncertainties
The largest uncertainty facing the proposed Barrick – Newmont merger at the moment is the possibility that Newmont either rejects the deal to focus on its current acquisition of Goldcorp, or the deal does not pass board approval. While Newmont has stated it plans to consider all options, their current position seems to be disinterested in an acquisition by Barrick. In a recent statement, Newmont said that Barrick’s proposal “ignores the risks and exaggerates the rewards of merging the world’s top two gold producers.” Additionally, Newmont management has questioned the $7bn synergy estimates put out by Barrick as unsubstantiated and overestimated.
Newmont’s initial hesitation is likely reflective of the hostile aggression of Barrick’s current offer and the fact that Newmont has previously walked away from talks with Barrick as recent as 2014 due to management differences. Since those 2014 discussions, Newmont has added 65% total shareholder return while Barrick has lost 22%. However, despite Newmont’s hesitation, the shareholder similarity between the two companies would make it difficult for Newmont to reject the offer if it holds support from both parties’ shareholders. Both Barrick and Newmont have been aggressively pleading their cases to key investors over the past week.
Cultural clashes in management may prove to be a serious concern in any new entity. The heavy rivalry, failure of past attempts to merge, as well as Newmont CEO Gary Goldberg’s reaction to the merger proposal are all disturbing factors that limit future managerial integration. Gary Goldberg, CEO of Newmont, dismissed the proposal at first by expressing it as a bizarre and desperate attempt to muddle up their deal with Goldcorp. However, if Newmont still decides to go through with the proposed deal, then it is plausible to expect difficulties in the merged entity initially, that has its roots in a complex integration phase of different company cultures.
In addition to shareholder approval and managerial clashes, there remains an uncertainty regarding whether Barrick is biting off more than they can chew with their recent acquisition of Randgold and now attempting another large acquisition. Barrick’s latest acquisition, recent poor performance, and the potential to pay $650mn in breakup fees could be the reasons behind what is considered a “low-ball” offer for Newmont. If able to be completed, however, the massive size of the combined entity could also force downward pressure on industry wages and reduce gold supplier competition. Regulatory risks and potential antitrust violations may also arise given the large market share the combined company would hold.
“We like the approach and the optionality that comes with the Barrick merger proposal but — and this is the important thing — it has to be seamless and not too hostile, both parties need to want this deal.” - Simon Jäger, Flossbach von Storch portfolio manager
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