NEW YORK (ResourceInvestor.com) -- Criticized for a slow response to Harmony Gold's [HMY] hostile takeover bid, Gold Fields [GFI] is now manoeuvring quickly to outflank the raid on it.
Meanwhile market sentiment started turning against Harmony today as arbitrageurs widened the Gold Fields bid spread and reduced the Iamgold [IAG] bid spread.
The first redoubt is being built around the timing of the Gold Fields shareholder vote on the proposed transaction with Iamgold.
Gold Fields has moved to neutralize hedge fund arbitraging of the deal by setting the date-of-record for Gold Fields ADR holders to 29 October 2004. The actual date of the vote has not been set, but it will certainly be set before the Harmony shareholder vote scheduled for 12 November, likely as close to the Harmony deadline as possible.
Harmony chief executive, Bernard Swanepoel, told Bloomberg News earlier Tuesday that he will probably look to the courts to prevent an early Gold Fields vote.
Should Gold Fields shareholders vote to support the Iamgold deal then Harmony's bid, at least in its current form, will be defeated because of the terms of the irrevocable arrangement with Norilsk-Nickel [NILSY]. Sources close to Gold Fields say the producer is confident of victory given that it needs a simple majority and has canvassed considerable support already.
Tuesday's relaxation of foreign exchange controls does not make victory simple though.
There is now an increased chance of Gold Fields shareholders voting against the Iamgold deal if it is perceived that the rerating rationale has been affected. That is not necessarily a final strike against Gold Fields, but losing an early vote would be extremely damaging, even if shareholders' thereby signal a preference for a retooled growth strategy as opposed to breaching the barricades for Harmony.
Gold Fields would then throw everything into thwarting Harmony's effort to persuade its shareholders to authorize an increase of nearly 200% in the company's share capital. The authorization would be blocked if just one quarter of shareholders say no.
Already, Sandy McGregor of Allan Gray in SA and owner of about one-seventh of Harmony, has indicated that he opposes the deal because of its dilutive impact. Gold Fields will rely on that opposition as the foundation for an early victory, more so once it is combined with North American and European funds that do not want a "compounded" SA gold stock.
The second redoubt is being constructed from legal and regulatory obstacles.
Gold Fields especially wants to impale Harmony on the lances of its minority shareholders, exploiting grievances focused on the involvement of NorNickel.
SA's Competitions Tribunal has been asked to interdict Harmony on the basis that its "early bird" offer to acquire up to 34.9% of Gold Fields is illegal. Gold Fields says the structure of the early bird offer and the subsequent offer "is an unlawful construct designed to evade the jurisdiction of various regulatory authorities".
The third redoubt will be a messy affair suited to guerilla ambushes.
Gold Fields will seek to agitate among common shareholders, of whom there are many, about the value destruction proceeding from the M&A daisy chain that Iamgold started building earlier this year.
On top of the cash leaking to bankers and lawyers, shareholders are further concerned about SA gold producers having to cannibalize each other to stay alive even though gold prices are at the best levels in years. Although consolidation has been going on for some time and reasonably well received, the loss of diversity in the sector is annoying some of the most influential portfolio managers.
There will be an attempt to peel away the Harmony "onion", focusing on deal specifics such as promised cost savings, and the company physiology in terms of balance sheet, operations and executive pay for example.
Harmony put a game face on its latest quarterly financials, but they still revealed the tough situation the company is in as the strong rand combines with marginal asset quality to take its toll. Professional investors polled by us are already tuned to that message; invariably saying that Harmony needs Gold Fields to prosper or even survive. There is also dislike of NorNickel's unknown agenda.
"Bernard is trying to releverage the assets he's got," an American gold fund manager said, adding that Harmony was cornered by its lack of ore body flexibility.
Derivative attacks will home in on Harmony's lack of a proven deep level mining track record. There will be direct comparisons drawn between Harmony's record with its Elandskraal and Evander operations versus the requirements of ultra deep mines like Kloof and East Driefontein.
In an era of smart bombs and precision targeting, this war looks likely to generate heavy collateral damage.