Gold giant Barrick gets greedy

Canada’s Barrick Gold gobbled up a rival just weeks ago, and now wants to take over another. Does the deal stack up? Matthew Partridge reports.


Giant mining mergers have a poor track record

Less than two months after buying Randgold, the Canadian gold miner Barrick Gold is at it again, says Emily Gosden in The Times. It has launched a hostile bid to take over its biggest rival in an $18bn all-share deal. While Barrick isn't offering to pay a premium over Newmont's current share price, it argues that the deal offers up to $750m a year of synergies. These wouldcome from combining both companies' operations in Nevada. The tie-up would be contingent on Newmont abandoning its current bid for Goldcorp.

Newmont is unlikely to let the deal take place without putting up a fight, says Jon Yeomans of The Daily Telegraph. While Barrick's CEO insists the merger would create "the world's best gold company", Newmont's CEO has called it a "desperate and bizarre" attempt to sabotage his company's takeover of Goldcorp; the merged firm would have to pay Goldcorp $650m if it pulled out of that deal. He also claimed that, based on the relative share prices of the two companies, Barrick was actually offering Newport shareholders a "negative premium".

The size of the deal, and the fact it comes so soon after the Randgold takeover, makes it look "hubristic", says the Financial Times. Competition regulators are unlikely to be thrilled that any new company would "easily top the gold production table with much more than ten million ounces a year".

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Still, it would be a mistake to dismiss the tie-up out of hand. It makes financial sense, adding to earnings per share while neither side holds much debt. And there are certainly potential cost savings from combining the two groups' Nevada operations, even after you deduct the $650m costs of scrapping the Goldcorp deal.

Hostile bids can "foster tremendous creativity", says Liam Denning on Bloomberg. And Barrick "may have gone in a mite too hard" with its estimate that combining operations could save a totalof $7bn, "more than a third of Newmont's market cap".

This forecast stretches over a 20-year period. "Just to give you a sense of how easy it is to project things over 20 years, cast your mindback to February 1999 and consider all the things that have happened since then," notably two huge bear markets, quantitative easing and Trump: "a lot of unexpected stuff." Barrick's prediction of large synergies also seems hypocritical given its opposition to the Newmont-Goldcorp merger.

Would a joint venture make more sense?

There is only a "glimmer" of possibilitythat the deal would live up to expectations.If Bristow "insists on chasing" it despite the "limp benefits for both sides, it's his shareholders who may be feeling hostile".

Warren Buffett's bad bet

The biggest individual loser may be Warren Buffett, says the Financial Times. He not only arranged the 2013 merger, but his "sprawling" investment vehicle Berkshire Hathaway owns 27% of the shares. Ithas now had to swallow a$3bn impairment charge onits investment.

The episode proves that even Buffett can get things wrong, says Nicole Friedman in The Wall Street Journal. While Kraft Heinz was "a classic Warren Buffett bet", in that it was "an easy-to-understand company stocked with iconic American brands", a gradual shift towards healthier or more natural ingredients and away from processed foods hasleft the conglomeratewrong-footed.

Buffett has "long bet that strong consumer brands will help companies maintain market share and pricing power". Nonetheless, this episode proves that "evenMr Buffett's long successful investment philosophy is vulnerable to sudden shifts in consumer taste".

City talk

This deal looks attractive for Danahar since it "should fundamentally reshape its business and make it a major provider of technology and tools to biotechnology and drug companies".

The Competition and Markets Authority's decision effectively to block the merger between Asda and Sainsbury's may have caused a lot of "gnashing of teeth" at the two companies, but it's hardly surprising, says Neil Collins in the Financial Times. For all the "technical arguments" and "gobbledegook", including the threat of "big beasts from abroad" (Aldi and Lidl), the merger was designed to allow two groups to control 60% of our "most important consumer industry".

The bid by Non-Standard Finance (NSF) to buy Provident Financial is shaping up to be quite a fight, says Patrick Hosking in The Times. But NSF should remember that Provident's core business of guarantor loans is "deeply unlovely". The lender usually extracts 50% interest from the borrower while taking very little risk because it has recourse to the guarantor. Such loans are a "daft way" for families to borrow when there are cheaper alternatives. That means they could soon be subject to a crackdown by the Financial Conduct Authority, or even banned.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri