Surprise takeover bid is winning converts — Royal Oak offers

In a classic case of David taking on Goliath, middle-tier gold producer Royal Oak Mines (TSE) has launched an aggressive takeover bid for senior gold miner Lac Minerals (TSE).

A successful takeover would put Royal Oak among the top five North American gold producers, with annual production exceeding 1.3 million oz. at an average cash cost of US$214 per oz. Moreover, it would become the largest producer of Canadian gold, according to Royal Oak President Margaret (Peggy) Witte. In 1993, the company cranked out 276,000 oz. from four Canadian gold mines.

Lac’s Canadian gold operations accounted for more than 502,000 oz. of production in 1993.

At a press conference in Toronto, Witte explained why her company is interested in acquiring the major:

“Lac’s previous stock price has not reflected the achievable value from its portfolio of world-class assets. Royal Oak is a very aggressive, growth-oriented company cents whereas] Lac has been a fairly sleepy company and underperformed the market consistently for the last few years. We really want to unlock the value for Lac’s shareholders by imposing the aggressive Royal Oak management on these assets.”

Analysts also believe Lac is undervalued — given its strong cash flow, increasing gold reserves and US$462 million in cash and short-term investments.

Some analysts who previously considered such an offer as unlikely to succeed are now changing their tune. Barry Allen, gold and precious metals analyst with Deacon Barclays de Zoete Wedd, said: “If you had asked me a week ago whether the offer had a chance, I would have said no. But Peggy has done an effective and convincing job of selling the deal. She’s very astute and quick and she’s gaining support.”

Witte has been highly critical of Lac’s management, blaming it for the company’s lacklustre performance. She said there is a difference between the corporate philosophy of the two companies. “Royal Oak is a very modest, growth-oriented company; we put our money into exploration, into the ground, into finding new reserves. The Lac head office for managing 1 million oz. has 62 employees; we’re now managing half a million ounces, with approximately 17 employees.”

For the most part, Lac has remained quiet as it contemplates its future. Upon hearing news of the bid, Lac stated that the offer was both unsolicited and unexpected and that, as such, it was unable to comment further. More recently, however, Lac’s board of directors met and decided to retain independent financial advisers to evaluate Royal Oak’s bid. Unconfirmed reports indicate these investors are Goldman Sachs of New York, Wood Gundy and RBC Dominion Securities of Toronto. The advisers will recommend whether it is in the interest of Lac’s shareholders to accept or reject the offer when it is received.

Under the terms of the bid, Royal Oak will tender $3.75 in cash and 1.7 Royal Oak shares for each outstanding Lac share. The cash portion of Royal Oak’s offer represents 28% of the total offer.

Alternatively, Lac shareholders may choose to receive 2.4 Royal Oak shares for each Lac share held. Currently, there are about 148.7 million Lac shares outstanding, with Royal Oak holding 3.8 million, or about 2%. Lac Chairman Peter Allen is reported to have about 1 million shares.

Based on both stocks’ closing price on the day prior to the bid, the offer equates to a Lac share price of $13.59, yielding a 20% premium over the previous day’s closing price. The estimated value of Royal Oak’s bid is about $2 billion.

Royal Oak’s offer is subject to certain conditions: two-thirds of Lac’s outstanding shares must be tendered; Lac’s shareholder rights plan must be removed; Royal Oak shareholders must approve the issuance of shares needed for the acquisition; and the spot price for gold must remain above US$360 per oz. The offer will expire Aug. 9, 1994.

The Lac shareholder rights plan — or, as it is more commonly known, the “poison pill” — allows Lac management to flood the market with new shares at half price once any group acquires more than 15% of Lac’s shares. However, a bid for all the shares will become a “permitted bid” if 50% of Lac’s shareholders approve the bid. There has also been speculation that Lac might dividend-out the reported US$462 million. According to Barry Allen, both these actions are unlikely if more than half of Lac’s shareholders accept Royal Oak’s offer.

Royal Oak has established a US$425-million tender facility to fund the cash portion of the bid. In addition, it has arranged a US$700-million take-out facility to refinance the bridge, provide working capital and refinance all debt carried on Lac’s balance sheet.

Witte estimates the combined company will produce gold at a cash operating cost of US$211. This compares with Royal Oak’s cash operating cost of US$311 and Lac’s, of US$199. Total costs per ounce were US$336 for Royal Oak and US$375 for Lac.

She also estimates that “the combined company can generate synergies cents combined savings] of up to $40 million this year and $50 million next year.” The savings would come from the consolidation of office management, exploration efforts, productivity improvements, administrative cost savings, consolidation of assets and the implementation of Royal Oak’s gold and currency hedging strategies.

Speculation regarding whether other companies might announce a competitive bid or come to Lac’s aid in the role of a white knight have also surfaced. Companies that could act in either of these roles include: American Barrick (TSE); Placer Dome (TSE); Cambior (TSE); Cyprus Amax (NYSE); Hemlo Gold Mines (TSE); Battle Mountain Gold (NYSE); Pegasus Gold (TSE); and Minorco. At presstime, shares of Lac closed at $13, unchanged from the previous day’s close, on a volume of 2.3 million shares. Royal Oak ended the day down 13 cents to close at $6.13.