Royal Gold tops Franco-Nevada’s bid for International Royalty

Royal Gold (RGL-T, RGLD-Q) has signed an agreement to acquire International Royalty (IRC-T, ROY-X) for $749 million in cash and shares, outdoing a $640-million all-cash hostile bid by Franco-Nevada (FNV-T) earlier this month.

The deep-pocketed Franco-Nevada can still make another offer but any deal that doesn’t end in Royal Gold’s favour will be subject to a hefty US$32-million break fee.

International Royalty chairman and CEO Douglas Silver says the Royal Gold offer is more enticing over the all-cash deal because it gives shareholders the benefit of still holding stock in a royalty company.

“This rollover we can do in this transaction allows our Canadian shareholders to continue to invest in the royalty space on a tax deferred basis,” Silver said in an interview. “It’s a very powerful story compared to an all-cash bid where everybody has to pay taxes immediately.”

Royal Gold has offered $7.45 in cash or 0.1285 Royal Gold shares for each International Royalty share. The company will pay a maximum of US$350 million in cash and a maximum of 7.75 million Royal Gold shares.

International Royalty shareholders who live in Canada will be able to exchange their shares for shares of a Canadian Royal Gold subsidiary.

The offer is a 70% premium over International Royalty’s 20-day volume-weighted average trading price leading up to Dec. 4, the last trading day before Franco-Nevada’s offer. Franco-Nevada’s $6.75-per-share offer was a 43% premium.

Royal Gold president and CEO Tony Jensen says the combined company will have even stronger cash flow that is set to grow with 31 producing assets and another 20 in the development stage.

Jensen says with the added revenue – IRC brought in about $40 million in the 12 months ending Sept. 30 while Royal Gold’s revenue was about $73 million – will enable it to do bigger royalty financings with companies looking to fund development without diluting equity or going into debt.

“Every CEO’s dream is to build a company out of cash flow rather than selling equity into the marketplace,” Jensen says. “That’s how wealth is created and I think we are starting to get that momentum in Royal Gold.”

The deal will also give Royal Gold more exposure to Canadian investors.

“We have an extensive Canadian following,” Silver says. “We trade a lot of stock in Canada compared to Royal …we were originally a Canadian company and also we have substantial royalties in Canada.”

Much of International Royalty’s revenue comes from nickel royalties but that will change once Barrick Gold‘s (ABX-T, ABX-N) 18-million-oz. Pascua Lama gold project, which straddles the borders of Chile and Argentina, reaches production in 2013. International Royalty has a 0.473%-3.15% sliding scale royalty on the Chilean portion of the deposit. The royalty will add US$20 million in annual revenue.

Royal Gold holds a smaller Pascua Lama royalty about one-third the size of International Royalties’.

If the deal goes through, Royal Gold will gain 84 royalties including the 2.7% NSR on the Vale’s Voisey’s Bay mine in Labrador.

And the combined company will have a total of 200 royalty interests and 11 producing assets. About 70% of total revenue would come from precious metals, the rest from base metals.

Royal Gold shares were up 2%, or $1.02, to $51.25 on a trading volume of about 4,000 shares in Toronto on Dec. 18 when the offer was made.

International Royalty shares were up more than 4%, or 32¢, to $7.64 on a trading volume of 9.1 million shares.

Franco-Nevada shares rose 4¢ to $26.14 each on a trading volume of 802,000 shares.