Overseas investment may not all be good. Many local businesses are ripe for picking by corporate raiders, reports Jacques Magliolo
The Proposed takeover of Randgold by Fraser Alexander and consortium is “significant as a precursor to other hostile takeovers”, say corporate financiers, who add that the takeover threatens to destroy complacent lifestyles of directors and eliminate inefficiencies or close down such companies.
Fraser Alexander’s intention to acquire Randgold has sparked speculation that South Africa could follow the US as a market “rife with corporate raiders and white knights”. The first is a term for individuals or companies who attempt to acquire control of companies by making an attractive offer to shareholders. The second denotes a company which steps in to save the firm which is being targeted.
While some analysts assert the Randgold takeover should shake up all the mining houses, some believe that “Anglo, JCI, Goldfields and Anglo Vaal are too big to fall to such takeovers”.
“Such comments are naive and dangerous,” says a corporate financier. Cross-border takeovers have already been conducted and successfully implemented. She cites last year’s takeover of Osprey Mine by a Swiss consortium as an example. The mine has recently been relisted under the development capital market under the name of Northfields Gold Mine.
One corporate financier believes that even companies the size of Anglo Vaal Holdings could fall to corporate raiders. An assessment of the company shows that its directors are also major shareholders, controlling as much as 54 percent of the 24,8-million issued shares.
At 13 800 cents a share it means they control more than R3,4-billion worth of Anglo Vaal’s shares. To successfully conduct a takeover of this company at least 50% of the total issued capital would have to be bought at a premium to persuade the remainder of the shareholders — directors and minorities — to sell their shares.
Even at a 100 percent premium this would cost the raiders R6,4-billion. Experts agree that the amount is “significant but not a major deal in the US, particularly if the finrand mechanism is used”. Under such conditions only US$1,4-billion would have to be raised, which is “small and marginal when it comes to the aggressive US shareholder”.
When asked how such vast sums could be raised in South Africa, analysts say that as long as it is through debt and not through issuing shares, it doesn’t matter what mechanism is used.
Companies have the option of using a combination of bank loans and issuing debentures or they could issue their own gilt. The average cost of each bond on the market is at present around R1-million and means that only 3 000 bonds would have to be issued to raise R3-billion. Derivatives dealers say, given that R1-trillion worth of bonds are bought and sold annually in South Africa, raising R3-billion “should be no problem at all”.
Says Ernst & Young Corporate Finance MD Graham Royston: “South Africa is not geared up to contest such takeovers or to raise funds through secondary market”. Essentially, bonds issued by companies would have to be attractive enough to entice investors to buy these high risk-high gain gilts.
Yet this is an untapped, totally legal market which experts expect to become more widely used in the future. Strong market speculation is that in addition to an RDP Bond, stockbrokers are likely to introduce their own version of the US Junk Bond in the near future.
So what difference does it make who owns a company? After all, shareholders — who are owners of the company — have every right to take up an offer which is nearly twice the value of their shares.
A closer look at the outcry over the Randgold case shows that shareholders are not being made an offer in money terms, but are being asked to install the consortium as new management to unlock value and make the mine more profitable. Yet they are not the ones complaining. The problem is centred on managers, directors and workers, who are afraid that the new owners will strip the assets and sell off the company, rather than continue to run its operations.
Says a gold analyst: “The National Union of Mineworkers and management have a very real fear that the mine could be closed down. After Fraser Alexander took over Rand Consolidated they reduced the workforce to 600 from about 3 000.”
In addition to the 32 000 workers who NUM expects will be affected by a possible closure, concerns are that the consortium has no experience in running a gold mine and has every intention of closing it down.
In fact, not a single member of the consortium has experience in gold mining. Fraser Alexander’s experience is limited to slimes dams. Time Mining owns and runs Rand Leases, Aurora Mining’s experience is in granite and SC Warburg is a UK Merchant Bank.
“The holiday is over,” says a gold mining analyst, “directors will have to run far tighter ships in future if they are to avoid having to deal with the Fraser Alexanders of this world.”