By Gustaf Baavhammar, Lukas Bruell (Warwick) 12/10/2018 |
Overview of the deal
Acquirer: Barrick Gold Corporation
Target: Randgold Resources Ltd.
Estimated value: $6.5bn
Announcement date: September 24th 2018
Acquirer Advisors: M. Klein & Co, Morgan Stanley
Target Advisors: CIBC, Barclays
Barrick announced its plans to merge with Randgold in an all-share deal merger for $6.5 billion. Following this, Barrick Gold would effectively own five of the ten tier-one gold assets, thus enabling the new entity “New Barrick” to significantly leverage its market power by having the greatest concentration of tier one assets and the lowest total cash costs of the entire industry. Having announced to create a new gold behemoth with a geographical focus in the Americas and Africa, further speculation arose if Newmont, another leading mining company, and Barrick may restart tie-ups after talks failed in 2014 due to management differences.
The mega-merger comes at a time where the gold industry is struggling to convince investors of its capability to generate enough cash given the fact that Barrick’s production fell from 8 million ounces annually a decade ago to 5.3 million to date. Further pressure on gold prices due to the strong dollar increased even further resulting in a share-price drop of 30% this year. Hence, Barrick aims to counteract that trend by growing inorganically by consolidating two major players.
“Randgold has the agility and swift-footedness of a younger and smaller company, much like Barrick in its early years, while Barrick has the infrastructure and global reach of a large corporate company,” - John L. Thornton, CEO of Barrick
Company details (Barrick Gold Corporation)
Barrick Gold Corporation is the largest gold mining company in the world with operating mines in the US, South America, Africa and Canada.
- Founded in 1983, headquartered in Toronto, Ontario, Canada
- President and CEO: John Lawson Thornton
- Number of employees: 18,421
- Market Cap: 12.91B - EV: 18.752B
- LTM Revenue: 7.72 B - LTM EBITDA: 3.53B
- LTM EV/Revenue: 2.43 - LTM EV/EBITDA: 8.36
Company details (Randgold Resources Ltd)
Randgold is a gold mining business operating mainly in Mali and provides development, exploration of gold and precious metals in Africa.
- Founded in 1995, headquartered in Jersey, Channel Islands
- President and CEO: Mark Bristow
- Number of employees: 11,659
- Market Cap: 6.62B - EV: 6.29B
- LTM Revenue: 1.19B - LTM EBITDA: 519.76M
- LTM EV/Revenue: 5.28 - LTM EV/EBITDA 12.1
Projections and assumptions
Barrick is offering 6.128 of its shares for each Randgold share in an all-share deal, giving Barrick´s shareholders 66.6% with the rest controlled by Barrick´s investors. Both stocks were trading higher after the announcement, with Barrick´s and Randgold´s stocks up by 5.8% and 6.6% respectively as shareholders of both firms are expecting consistent complementary strength and a common vision, thus creating significant shareholder value.
Following completion of the merger, the new Barrick Group will have a market capitalisation of $18.3bn, aggregated revenue of approximately $9.7bn as well as the highest adjusted EBITDA margin. Stronger cash flow generation can be achieved due to its exposure to Africa and established long-lasting relationships with Chinese companies as well as its then control of numerous Tier-One assets, among them being Barrick´s Cortez and Randgold´s Kibali mine in Congo.
More, the merger enables Barrick to reposition itself by eliminating non-essential costs and the sale of non-core assets, thus continuing its prudent debt reduction as demonstrated by the 51% debt reduction since the end of 2014 as it was struggling with an overburden of debt arising from its mining activities across five continents. More benefits are to be expected of Randgold´s excellence in underground mining - know-how that Barrick does not have due to its emphasis on unearthed gold in open pits so far.
One of the most important long-term opportunities for Barrick is to strengthen its position in the African market, and consequently become the world leader in the gold mining, overtaking Newmont Mining Corp. For many years, Africa has not been a prominent market for Barrick and its main subsidiary, Acacia Mining Inc - partly due to the decline of the gold mining sector, which has struggled to attract investors, but also due to controversies with governments and its difficulty to adapt to the challenging nature of market. The merger with Randgold provides an opportunity to get access to valuable and established African mines.
Simultaneously, the deal will help Randgold to diversify its Africa-dominated portfolio and expand into global markets, thus increasing investor confidence about the future growth of its operations. Furthermore, given the size of the combined companies, the transaction will give the NewCo a strong position in the global mining industry as well as the benefits of economies of scale, e.g. shared exploration, mining and distribution costs.
Another interesting point is the potential impact of management synergies. Randgold’s Founder and CEO Mark Bristow is expected to lead the NewCo and implement his unique and stable growth strategy on the $18.3bn gold empire, in an industry that is known for short-term decision making. Bristow’s strategy is underlined by an investment filter with strict criterias, which aims to improve efficiency and long-term profitability. Barrick’s global asset base coupled with Randgold’s agility and successful investment strategy can result in significant value creation.
Risks and uncertainties
While the transaction is an all-stock nil-premium merger, the price tag of $6.5bn for Randgold is steep. Barrick paid a multiple of 10.6x LTM EBITDA, which is 80% higher than the peer trading average of 5.9x EV/EBITDA. The multiple paid is expensive, especially for the gold mining sector where valuations are easier to estimate because of the high portion of tangible assets. Even though Randgold is a relatively small company, it is expected to contribute for 50% of the NewCo’s $1bn free cash flow. Hence, Barrick has set high expectations for the future cash flows, which puts pressure on the post-merger integration, in particular the implementation of the new investment strategy.
The uncertainty in Africa poses a significant risk for the NewCo. Although the region provides interesting growth opportunities and Randgold has a strong track record, it faces high political, regulatory and operational risk. As a result, Barrick announced that they will seek Chinese investments in some of its African assets to offset the higher risk from the deal. However, this might not be enough; Barrick has built its organization by expanding in relatively safe regions, e.g. United States, and it is unclear whether Randgold’s emerging markets strategy could be successfully integrated in Barrick’s large scale operations.
Furthermore, the deal brings together two executives with very different leadership styles and previous experience, hence there is a possibility of a cultural clash in the NewCo. Randgold’s Bristow is a South African entrepreneur who has been working in dangerous African countries, and Barrick’s Thornton is an ex-banker who focuses primarily on global expansion. Although both executives say that they share the same vision for the combined businesses, there are obvious cultural differences which may impact the integration process.
"If the companies do combine, Mr Bristow must manage a much larger, more complex business than he has to date. He will have to show that the expertise he displayed in Africa is useful in developing Barrick’s mines in, say, Nevada. Time to test his Midas touch.”
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