Why Lundin Mining shareholders should reject the Equinox Minerals bid?
After Inmet Mining announced their takeover decision of Lundin Mining, the Equinox Minerals come up with a 26% premium bid on the closing price of Lundin on February 28, 2011 (%6.45). The offer was either $8.10 per share in cash, or 1.2903 Equinox shares plus $0.01 for each Lundin share. The offer values the Lundin at C$4.9 billion (9.5x EBITDA) where as the Inmet’s all-stock deal valued the company at C$3.6 billion (8.3x EBITDA) But if all shareholders decide to take the cash offer, the maximum of C$2.4 will be prorated. That structure is similar to a call option, you will get the fixed value of C$2.4 and the remaining C$2.5 will based on the stock performance of the combined entity (Share Price of Equinox times the Fixed Shares. As the share price goes up, thus the value of the remaining portion) But wait a minute!
The Equinox will finance the takeover through $3.2 billion debt from Goldman Sachs. The post-merger Debt to Equity ratio will be one of the highest in the North American Mining Industry with 75%. At that high debt levels, if copper prices will fall the new company will struggle to honour the interest payments, thus put the shareholders at higher risk. The payment of 26% premium through heavy debt burden is already pushing the share price of Equinox Minerals down, which is lowering the worth of fixed share price offering of the deal. In order to satisfy the premium, the Equinox may issue more shares but that will further dilute the current ownership (and further draw down the share price)
Although the Equinox Minerals bid have a 26% premium offer, the high debt financing combined with fixed shares offer makes the deal unattractive.
Advisors of Lundin Mining: Scotia Capital
Advisors of Inmet Mining: CIBC, Rothschild
Advisors of Equinox Minerals: Goldman Sachs, TD Securities