THE VISIBLE HAND
The ghost of Brett Kebble haunts Barrick-Randgold deal
Late dealmaker helped launch the company that will now be part of the largest gold miner in the world
It’s a terrible thing to admit, but a decade or so after Brett Kebble’s death, it turns out he did something incredible: he helped launch the company that will now be part of the largest gold company in the world. Would that he were alive to savour it, and the billions he would then probably have blown on dubious art.
After three years of negotiations, Canadian gold major Barrick and Kebble’s protégé Randgold Resources have put together an unusual deal to create an $18bn nil-premium merger that will create the world’s biggest gold mining company.
Actually, the truth is a bit more complicated than this, as it always is. The person who really was really crucial in the creation of Randgold Resources was Peter Flack, who, legend has it, was on the verge of firing Randgold CEO Mark Bristow when Bristow convinced him about the future of gold mining in West Africa. Flack changed his mind on the spur of the moment. Kebble’s role was relatively minor, but he did help raise the finance to give Randgold Resources its first asset, and for that Kebble’s vehicle Randgold Exploration got its minority stake in the namesake company.
But after that, it was always Bristow’s enterprise, and he really hasn’t put a foot wrong since, building a substantial company, now twice the value of Anglo American Ashanti. He did so partly by resisting the temptation to splurge on assets when the gold price was running, avoiding hedging, and being generally methodical and tough-minded.
But what intrigues me about the deal is the nil-premium aspect; is this fair to Randgold shareholders? Nil-premium mergers are not unheard of, but generally, if a company is going to give up its independence, the buyer ought normally to pay for the privilege.
The Financial Time’s Lombard columnist Matthew Vincent wrote some time ago that nil-premium mergers of equals exist only for two reasons: so the buyer can pander to the seller’s ego and pay as little as possible for control. In other words, they pretend to be equals so that the buyer’s shareholders get the better of the deal, and that’s achieved by flattering the ego of the sellers.
He then goes on to list a whole string of “mergers of equals” that quickly ended in disaster, including famously the merger between huge advertising companies Publicis and Omnicom, where the joint CEOs fell out over who would be the finance director.
Reading between the lines, this must have been one of the reasons why the Barrick merger took so long to negotiate.
The argument in favour of the merger looks like this: each of the companies gets something they currently don’t have. Barrick shareholders get some pizzazz to its declining portfolio, much required since its key asset Goldstrike is getting a bit long in the tooth. They also get $800m, which is not to be sniffed at.
Randgold shareholders get an international portfolio of mines, which reduces what is known in the industry as “jurisdictional risk”. That's a polite description for the risk that some bonkers despot will get voted into power, or take power, and move the goalposts.
The counter-argument is that actually, one of the things Randgold and Bristow have been enormously careful about is their risk profile. They have invested generally in countries only where these “jurisdictional risks” are low in the first place, and they have worked hard to keep them low. For example, Randgold is not invested in South Africa!
In any event, its fair to say, African “jurisdictional risk” is something non-Africans apply to the continent as a whole, but as we in the continent know, Africa is not a singular place; there are vast differences between countries and mining codes, conditions and prospects.
The second argument in favour is that Bristow will become the CEO of the new group, and Randgold Resources finance director Graham Shuttleworth will become the finance director, avoiding that issue. Hence, from a Randgold shareholder point of view, the key executives that were such money-spinners for them get to rule the roost and hopefully perform their magic once again but this time on a much, much bigger canvas. This, by the way, of course also explains why Kelvin Dushnisky, the former president of Barrick, moved over to AngloGold.
There is a slight counterargument here too, and this is a sensitive point. Bristow is a great personality and he has been an excellent CEO. His love of the continent, his straight-talking style and tough-mindedness are all well known. And what’s more, his motorcycling exploits around Africa are legend.
But in all honesty, how objective can you be when you recommend a deal where you personally go from being a substantial player to being the head honcho of its largest component? Just asking.
Wall Street Journal writer Paul Davies says looking for value in this deal is like panning for gold. It may be there, but it takes hours of careful inspection. It may be that Barrick will need to make the gold a bit more obvious. As it happens, the Randgold share price is currently running a bit higher than the notional share price of the deal. That suggests shareholders think so too.