Key points:
- GFI has made an all share bid for AUY
- Both boards have approved, it looks like it will go through
- But will another bidder arrive to disrupt the merger?
Gold Fields (NYSE: GFI) stock is down 10% as it announces that it is to buy Yamana (NYSE: AUY) (LON: AUY) for $6.7 billion. Except, of course this isn't quite true as it's an all share deal and the decline in Gold Fields stock by 10% makes Yamana stock worth less – by about $670 million in fact.
This is because it is an all share deal, the terms of which are “Yamana Shares will be exchanged at a ratio of 0.6 of an ordinary share in Gold Fields (each whole share, a “Gold Fields Share”) or 0.6 of a Gold Fields American depositary share (each whole American depositary share, a “Gold Fields ADS”) for each Yamana Share”. That was, at the time that price was set, a considerable premium to the market price of Yamana stock – 33.8% of the pre-announcement 10 day weighted average. However, then we come to how stock markets react to stock based bids.
The standard reaction is to sell the bidder, buy the company being bought. This locks in the premium being paid for control. If Gold Fields is paying 0.6 of a share for Yamana, there's a 33% discount between the Yamana and Gold Fields price, then owning Yamana means getting Gold Fields stock at a 33% discount. Why not? So, sell Gold Fields and use the proceeds to buy Yamana. At the end of the set of transactions you'll own 33% more of Gold Fields than you did at the start.
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It's also true that many stock based takeovers do not prove profitable for the bidding company and the markets know this. Finally, there are going to be a lot more Gold Fields shares around, so presumably they're going to be worth less – when there's more of something each one does tend to be worth less.
As to what happens next now we get into game theory. Yamana is now obviously in play. They've agreed that they're ready to be taken over so now the argument is only one over price. If someone else is willing to step in and offer a better price then perhaps this deal will get broken. At which point in order to retain the deal Gold Fields will have to offer a better price. Perhaps more of a share that is – 0.7 of a GFI for one AUY? Or some other multiple. But there's a limit to how much this will work. Because with every raising of the price that Gold Field stock becomes worth less and less as against the Yamana. It isn't, that is, possible to continually raise an all stock bid simply because at some point of share issuance the price isn't rising.
We also get to the slightly odd situation that if another bidder does arrive and then wins that bid for Yamana then the Gold Fileds stock price should reverse and rise again – even though they'll just have been denied what they say they think is a good bargain.
Both boards – of GFI and AUY – have approved the transaction so it's likely that it will go through – in the absence of another bidder that is. But with Yamana now obviously in play, who knows?