Anglo American had been looking to sell its 20% stake in South African gold company Gold Fields of South Africa, the fourth-biggest in the world, for some time.
Anglo American?s desire to cash in on its stake was strengthened by the $1.4 billion acquisition of Ghana?s Ashanti Goldfields by Anglo Gold, Anglo American?s South African gold subsidiary. Anglo Gold is to pay for the company with its own shares, which would dilute Anglo American?s stake in its subsidiary to around 45%. Anglo American wanted to liquify its minority Gold Fields stake to regain a majority stake in Anglo Gold.
Anglo American?s adviser, Citigroup, prepared a strategy to sell the stake on the equity markets, using two block sales. But it had also told Russian metals company Norilsk Nickel that Anglo American was looking to sell its stake in Gold Fields, and suggested that Norilsk might be interested in buying it.
Jay Collins, head of investment banking for CEEMEA at Citigroup, says he told Norilsk: ?We have another alternative, so you would have to move fast.? He adds: ?The big surprise is how fast Norilsk responded.? On Tuesday March 24, a senior representative at Norilsk called Collins and said his board was interested.
On Thursday March 25, Norilsk and Anglo American managed to work out a price and most of the terms of the deal. Citigroup advised Anglo American, and Canadian firm BMO Nesbitt Burns advised Norilsk. Somehow, the two managed to avoid the often tortuous negotiations of other Russian M&A deals. Collins thinks this was because Anglo American had the equity route for disposing of its stake ready to go. He says: ?The equity alternative didn?t have any conditionality, so any long delays were sub-par to the equity option. That meant the terms and conditions were take it or leave it.? Norilsk agreed to R77.50 a share, valuing the stake at just under $1.2 billion ? the biggest-ever Russian cross-border deal and the second-biggest-ever single investment into South Africa.
On Friday March 26, Norilsk asked if Citigroup would arrange its financing for the deal. This was unusual ? a bank acting as adviser for one side of an M&A deal and financier for the other. Collins says: ?It was quite extraordinary. But Anglo American wanted us to help the other side get the deal done, so we got their permission to wall off a separate team to work with Norilsk on the deal financing and foreign exchange.?
Collins and Atiq Ur-Rehman, Citigroup?s head of syndicated loans for Europe and Asia, headed the Norilsk team.
Norilsk needed $800 million in bank financing, plus a way to get $1.2 billion in rand ? Anglo American wanted rand to pay off Anglo Gold debt. That meant, over a weekend, working out a strategy to buy the rand and getting accounts set up for Norilsk and approval for the loan. It was a large, complex operation, with about 60 people involved from 10 Citigroup departments. Most worked 72 hours straight, led by Collins. A Citigroup colleague says: ?The man is a machine. I?ve never seen anyone with such a work ethic.? Collins says: ?This was Citi at its best ? doing multi-product, multi-regional transactions.?
The structure the team came up with was a six-month $800 million unsecured loan at 150 basis points over Libor. Citigroup was the sole underwriter; Norilsk wanted it to be the only financier, so news of the deal didn?t leak out and push up the Gold Fields share price.
That meant Citigroup was taking on a lot of unsecured Russian risk but it was comfortable with that. Collins says: ?Most large banks in the world would want to do business with this name, particularly as they were significantly under-leveraged in the scheme of global metal and mining names.? The bank was also keen to get the financing done so it could close the deal and pick up its fees from Anglo.
On Monday March 29, Citigroup bought $1.2 billion in rand without significantly moving the FX market, and the deal was closed.
Leonid Rozhetskin, deputy chairman of Norilsk, says the strategy to expand into the gold business makes sense for three reasons: ?First, the mine production of gold is declining, which is putting upward pressure on gold prices. Secondly, gold is counter-cyclical to the global economy, unlike other metals such as nickel or palladium [in which Norilsk is a leader]. Our holdings in gold will therefore improve the stability of our earnings. Finally, Russia has world-class gold deposits at attractive prices.?
But if Russian gold deposits are so cheap, why invest into a mature South African company, when one doesn?t even have a controlling stake or even necessarily a position on the board? Alexander Pukhayev, metals and mining analyst at UFG, says: ?The deal raises more questions than it answers. It?s in a totally different region, with different rules, and it?s a minority stake in a company which is valued more than Norilsk itself.?
It is a policy of Vladimir Potanin and Mikhail Prokhorov, the owners of Norilsk, to divest any holdings of companies in which they don?t have a controlling stake, which suggests they will try to increase their stake in Gold Fields. But the market now expects them to do that, so it won?t be cheap ? Deutsche Bank for one has moved Gold Fields from a hold to a buy recommendation on that view.
Pukhayev says he is loth to write off the deal as a mistake, partly because Norilsk has shown itself to be so savvy in past acquisitions. As Rozhetskin points out, the company bought 51% of US miner Stillwater in late 2002 for just $7.50 a share ? the shares are now worth over $15.
