There has been a flurry of activity in the gold patch this winter. It all started with January’s announcement that Newmont Mining (NYSE:NEM) would acquire Goldcorp (TSX:G)(NYSE:GG) in a friendly takeover worth $10 billion.
The combined company would be the largest gold company in the world, surpassing current title holder Barrick Gold. Not to be outdone, Barrick upped the stakes, making an $18 billion hostile takeover bid for Newmont.
After some terse public statements, Barrick agreed to drop its bid for Newmont after the two agreed to a joint-venture in Nevada. The precious miners have complementary assets in the state and, under the terms of the deal, will operate under a combined entity.
The deal is expected to generate an average of US$500 million in cost savings by eliminating duplicate costs and coordinating mine plans. The news was a positive development for both companies.
It did, however, have an unintended consequence. Following the deal, Newmont shareholders felt that the cost to acquire Goldcorp was too high. Will the deal fall through?
Price to acquire Goldcorp
Last week, New York hedge fund Paulson & Co wielded its big stick — a 2.7% ownership in Newmont. The hedge fund argued that under the current terms of the deal, Newmont was overpaying for Goldcorp. Why?
Paulson & Co argued that the deal with Barrick “materially increased the value of Newmont.” Under the current terms of the deal, Goldcorp shareholders will receive 0.328 shares of Newmont and $0.02 in cash for each Goldcorp share they own.
The argument is simple. Since Newmont’s underlying value has increased, the hedge fund argued that Goldcorp should receive less shares in exchange. Goldcorp stock dove 3% on Friday as a result of the deal being at risk.
Yesterday, Newmont announced a special dividend to help appease the detractors. The special dividend of $0.88 per share is payable only in the event that both sides agree to the deal.
It appears to have worked. Following the announcement, Paulson & Co announced that in light of the special dividend, it would no longer oppose the transaction. Goldcorp’s price rose in conjunction and is now trading where it was before the opposition news dominated headlines.
Goldcorp shareholders will not benefit
Before you get too excited, keep in mind that the special dividend is for Newmont shareholders only. The special dividend will be paid out to shareholders prior to the close of the transaction. In other words, the special dividend was introduced to appease Newmont Shareholders.
As of writing, the deal values Goldcorp at US$11.47 per share. This is achieved by multiplying Newmont’s current share price ($34.90) by 0.328 and adding the $0.02 per share in cash.
The low arbitrage spread of approximately 3% is a sign of confidence that the deal is likely to be approved. The arbitrage spread is the difference between the acquisition price and the price at which the target’s stock trades. If there were any further concerns, the market would price in greater risk with a bigger arbitrage spread.
It appears the Goldcorp deal is as good as done.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Mat Litalien has no position in any of the stocks mentioned.