Ashton gives Stornoway the brush-off, looks to OSC

The board at Ashton Mining of Canada (ACA-T) has rejected the takeover bid for the company made by Stornoway Diamond (SWY-T), and is talking to other possible bidders to get a better deal.

In addition, it is challenging the lock-up agreement Stornoway has made with Rio Tinto (RTP-N, RIO-L, RIO-A) based on a recent Ontario Securities Commission decision against American retailer Sears Holdings.

Stornoway offered $1.25 for each Ashton share in cash, up to a limit of $59.5 million, or one share plus 1. Rio Tinto (which holds a 51.7% interest in Ashton through two Canadian subsidiaries) locked its shareholding up with the offer, and opted for the cash bid. (That cash distribution would be pro-rated among Ashton shareholders taking the cash option.)

Stornoway has also offered 0.36 of a Stornoway share for shares of Contact Diamond (CO-T) in a bid to create a $200-million diamond developer. Agnico Eagle Mines (AEM-T, AEM-N), which owns 31% of Contact, is advancing $22.5 million to Stornoway, to be paid back in Stornoway shares if the bid for Ashton is successful. The deal would give Agnico a 14% interest in the merged company.

Ashton’s president Robert Boyd told a conference call that Stornoway’s offer “fails to recognize the value of Ashton’s key projects and creates a riskier project portfolio.” He noted Ashton’s most advanced projects were the pre-feasibility study on the Renard kimberlites in north-central Quebec, and three bulk-sampling programs on the same Foxtrot property as Renard, at the Artemisia property in Nunavut, and at the Buffalo Hills property in Alberta. Stornoway’s most advanced projects, as well as Contact’s, are not yet at the bulk-sampling stage.

Ashton’s board cautioned that the offer allowed shareholders of Stornoway, Contact, and Agnico to benefit from potential additions to value Ashton would make on Renard, where a 10,000-tonne bulk sample program is under way. Boyd said that among diamond developers, market value tends to be added disproportionately by discoveries of large stones, which were probable during the bulk sampling campaign on Renard and possible in the other more advanced projects.

Minority shareholders of Ashton would be left with about 12% of a merged company and the directors had determined that four recent takeovers representing a change of control in the diamond sector had been priced at an average 51.5% premium to the market.

Boyd also said the large shareholdings retained by Agnico and Rio (assuming a full distribution of the Stornoway cash to all Ashton shareholders), and the need for United States investors to sell their shares for tax reasons, would create a significant overhang of offers in the market, depressing the price of the merged company’s shares.

The “Sears problem,” in the view of Ashton’s board, is that the lock-up agreement between Stornoway and Rio Tinto gives Rio a $2-million break fee if Stornoway’s bid fails. Ashton is taking the view that the break fee is a benefit offered exclusively to one shareholder, and has applied to the Ontario Securities Commission (OSC) to have the bid or the lock-up agreement cease-traded.

In the Sears case, the OSC ruled against Sears Holdings, which had bid for the 46% of Sears Canada that it didn’t already own, but planned a subsequent vote on a takeover by minority shareholders that had not tendered to the bid. The OSC ruled Sears Holdings could not count shares that had been locked into two voting agreements and a tender agreement as part of a “majority-of-the-minority” approval for the takeover.

The Securities Commission’s reasoning was that the two shareholders that locked up their votes — Bank of Nova Scotia and Royal Bank of Canada, and a third shareholder, Vornado Realty, which had tendered to the offer — had received benefits in those agreements that were not offered generally to the minority shareholders in Sears Holdings’ bid. (The banks got a tax advantage by agreeing to vote for the later takeover, rather than realize the value of Sears Holding’s bid; Vornado got a legal release from Sears Holdings.) That ran foul both of Securities Act provisions that require equal treatment of all minority shareholders in a takeover, and of a Commission regulation that specifies voting procedures in takeovers.

The difference in the Stornoway-Ashton takeover is that majority shareholder Rio, unlike Sears, is selling its Ashton stake rather than buying out the minority shareholders. The rule under which the Sears decision was made applied specifically to business combinations between related parties. In addition, two of the Sears shareholders had not agreed to tender to Sears Holdings’ bid, but rather to vote their shares in favour of a business combination after the bid.