Eldorado wins Frontier over

Vancouver – Frontier Pacific (FRP-V) mounted a strong defence but has now submitted to Eldorado Gold‘s (ELD-V) revised takeover bid.

The two-month long battle saw accusations fly both ways over golden parachutes, opportunism, significant undervaluation, and mistreated information. The resolution shows the strength of a cleverly revised offer and reminds us how quickly things can change in the world of mergers and acquisitions.

The end result is that by July 2 Eldorado held some 162 Frontier shares, giving it control of over 93% of the company. Eldorado now plans to exercise its right to acquire the rest of the 12 million outstanding shares to hold the company outright.

The road to that result, however, was far from smooth. Eldorado first announced its unsolicited bid for Frontier on April 21, offering 0.122 Eldorado shares and a fraction of a cent for every common share of Frontier. The price represented a 28.6% premium based on April 18 closing prices and a 35.5% premium based on 10-day volume-weighted average share prices.

Frontier immediately filed a circular recommending shareholders reject the offer, calling it “opportunistic” in that it came just as reports from the Greek House of Parliament started to indicate the issuance of permits for Frontier’s flagship Perama Hill gold project were “tantalizingly close.” Frontier’s board also argued the offer simply did not represent fair value, especially considering Perama Hill’s “extremely compelling” economics.

Eldorado, for its part, continued to argue that the bid was more than fair, considering the benefits to Frontier shareholders: a substantial premium, significantly enhanced liquidity for Frontier shareholders in the form of Eldorado shares (Eldorado’s four-day liquidity is more than Frontier’s market capitalization), immediate participation in a growing gold producer now holding permits to develop another gold mine in nearby Turkey, elimination of “single project” risk, and the financial platform and flexibility to bring Perama Hill into production without further dilution to shareholders.

But Eldorado did more than stand behind its offer. It also voiced its displeasure with some of Frontier’s actions following receipt of the bid, saying in a news release the company was “disappointed with Frontier’s adoptionof golden parachute termination packages for its management and a tactical poison pill shareholder rights plan.”

Eldorado said that the termination packages “have the effect of enriching and entrenching Frontier’s management and are not consistent with Frontier’s stated goal of enhancing shareholder value.” It also contested Frontier’s argument that the shareholder rights plan was adopted only to provide management with sufficient time to find an alternative offer, saying the company had already had plenty of time to do so in the two years during which Eldorado has been pursuing Frontier.

Finally, Eldorado indicated its offer was more than fair based on its recent discovery of two petitions launched by Perama Hill-area municipalities for the annulment of the preapproval act issued for Perama Hill. Eldorado argued that if the petitions were granted it would take the Perama Hill permitting process back eight years.

Frontier fired back. The junior said the petitions are in no way new news but have been part of the public record since the process began in 2000. Moreover a negative outcome would mean a restart to the permitting process but much oif the work completed to date could be re-used.

The company also acknowledged that the compensation committee of the board of directors approved employment agreements for five senior executives one day after Eldorado’s bid arrived. But Frontier highlighted that these contracts had been under consideration for some time more than three months and, regardless, change of control provisions are common in executive employment agreements. Frontier than went so far as to compare the new $240,000 change of control provision for its own CEO, Peter Tegart, with the $2.5 million to which Eldorado’s CEO Paul Wright would be entitled in a similar situation.

Frontier had a counter for every Eldorado argument. The two years of solicitation from Eldorado did not count as time to seek alternative offers because Frontier did not want one it only began to search one out when forced to by Eldorado’s bid. The offer undervalued Frontier in terms of contributed production, cahs and short term investments, and resource count.

The battle lines seemed well-dug. But a slight revision to the Eldorado offer changed everything. On June 20 Eldorado added to its offer one exchange receipt for each Frontier share. The exchange receipts entitled the holder to receive 0.008 shares of Eldorado but only when the Greek Joint Ministerial Council issues a resolution accepting the environmental terms of reference for Perama Hill.

The exchange receipt represents a 6.8% boost to the total deal price, bringing it to $1.101 per share, but only if permitting moves ahead as needed. Blackmont analyst Richard Gray said incorporating the permitting risk into the offer price was a clever move on Eldorado’s part.

Perama Hill is in the Thrace region of northern Greece. The project currently hosts 11.7 million tonnes of oxide material grading 3.62 grams gold per tonne for 1.36 million oz. gold plus a potential open-pit sulphide resource ranging from 1.5 million tonnes grading 6 grams gold to 2.5 million tonnes grading 5 grams gold.

Interim numbers from a feasibility study underway for the project estimate initial capital costs at US$100.3 million. Operating costs come in at US$20.76 per tonne.

In addition to Perama Hill, Frontier holds a 50% interest in the Macusani uranium project in southeastern Peru. Frontier operates the project, carrying joint-venture partner Solex Resources (SOX-V). The project has seen ground radiometric surveys, channel and chip sampling, trenching, and 22,000 metres of drilling.

Frontier’s third property is the Taraira gold project in southeastern Columbia, adjacent to the Brazilian border. Frontier holds 51% of Taraira with privately-owned Cosigo Resources holding the remainder. The property, which sits at the far southwestern edge of the Neblina Basin, has seen limited work.

Frontier is currently trading around the $1-mark. The company has a 52-week trading range of 44 to $1.10 and has 164.6 million shares issued.

On news of the successful takeover Eldorado’s share price lost 48 to close at $8.13. The company has a 52-week trading range of $3.79 to $9.01 and has 345.3 million share issued.

Eldorado currently operates the newly reopened Kisladaq gold mine in Turkey, the Tianjianshan gold mine in China, and is developing the Efemcukuru gold project and Vila Nova iron ore project in Turkey and Brazil, respectively.