The Finance Ghost: Breaking down the commodities bidding wars

The Finance Ghost: Breaking down the commodities bidding wars
The mine access shaft at the Gold Fields Ltd. South Deep gold mine in Westonaria, South Africa, on 12 October 2022. (Photo: Michele Spatari / Bloomberg via Getty Images)

Whenever there is a high-profile merger on the table, there is the risk of it turning into a bidding war. Depending on which company you hold shares in, that’s either great news or very dangerous for your investment.

Like all of us, corporate executives get hot for the deal. Competitive tension kicks in, egos are triggered and corporate treasuries are emptied in an attempt to get the deal done at any cost. Thankfully, there are also many examples of cool-headed CEOs on the JSE who benefit from strong independent boards to keep things calm.

The likelihood of a bidding war increases in bull markets, as companies become far too cocky about their prospects. When we’ve been through tough times, valuations are lower and companies tend to be more conservative with offer prices.

In gold, we’ve just seen Gold Fields kicked to the curb by a competing bidder for Yamana Gold. After they invested months of work in the deal, a (slightly) juicier bid came in and seduced the Yamana board.

With a cash underpin to that offer and perhaps the opportunity to merge with international miners rather than a South African gold producer, the Yamana board changed its recommendation to shareholders and triggered the $300-million break fee to Gold Fields.

As a Gold Fields shareholder, I was only too happy to bank a considerable profit as a result. The market hated the risks of this merger and punished the Gold Fields price for months on end.

Ironically, this eventually scuppered the deal, as a fixed exchange ratio (the number of Gold Fields shares to be issued in exchange for each share in Yamana) became less lucrative to Yamana shareholders as the Gold Fields share price fell.

Credit to the Gold Fields management team: they opted to let this one go and not get caught up in a bidding war.

No sooner had the dust settled on the gold sector, than we saw more M&A action on the JSE, this time in the platinum sector. The fight over Royal Bafokeng Platinum has been going on for months, with Northam Platinum trying to block Impala Platinum’s attempted takeover of that company through the Competition Tribunal.

Northam is now trying to block it using a competing and considerably higher offer. Money talks, as they say. With Northam already holding a 34.52% stake (similar in size to Impala’s stake in Royal Bafokeng), the fight is over the remaining two-thirds of the shares.

Northam’s offer is R172.70 per share and Impala’s offer is just more than R150. Both vary based on share prices as the offers are part-cash, part-shares.

As is standard practice in the market in reaction to M&A news, the share price of the offeror fell (Northam was down 6% on the day) and Royal Bafokeng rallied on news of a higher offer.

The question now is whether we will have a bidding war on our hands. If Impala Platinum wants the asset, the company needs to do something about the substantial price gap versus the Northam offer.

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EasyEquities makes profit in tough market

The Purple Group share price has been a tough lesson for inexperienced investors. Based on their (understandable) love for EasyEquities, they drove the Purple Group price to levels that were completely divorced from the justifiable valuation.

A sharp drop in the price this year doesn’t mean that the business is doing badly. Group headline earnings per share is way down on last year, but that’s to be expected in a market that has fallen off the rails at the same time that the group is investing for growth.

The question here is whether EasyEquities has won enough market share to be sustainable. With operating profit of between R29.8-million and R33-million in that business specifically, it’s clear that it has.

Other than plenty of noise from fair value gains and a disappointing reversal in fortunes at Emperor Asset Management, the other great news for shareholders is that has achieved an incredible turnaround. With revenue returning to historic levels, a loss of R8.7-million has swung into a profit of between R13.4-million and R14.8-million.

Pick your spot in the value chain

In the journey from turning a tree into a magazine or newspaper, there are profits to be made by those involved. The profits vary drastically at different stages in the value chain.

Printing and publishing group Novus released a trading statement that guided a drop in headline earnings per share of between 82.4% and 97.4%.

With global pulp and paper shortages along with supply chain issues, the Novus business has suffered in these conditions. Even a decision to increase the stockholding couldn’t offset the pressure on input costs.

With the acquisition of a 75% stake in education business Pearson South Africa, Novus will hope to have more diversified earnings going forward.

At the very top of the value chain, we find Sappi releasing another record quarterly result. All the issues that cause pain for Novus are positive for Sappi, as constrained supply means that primary producers can push through higher prices.

This situation can’t carry on forever, with Sappi giving a more sobering outlook for the next quarter. The company is well prepared for that environment, with net debt down 40% year on year. In cyclical companies, it’s all about managing the business sheet through the cycle.

The year-to-date share price performances are enough to confuse anyone. Despite the earnings pain, Novus is up 49%. Sappi is up only 15.7%. As I remind you almost every week, valuations matter. Novus was a cheap value unlock play and Sappi is well understood by the market. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.


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