Gold giant Barrick gets greedy

Gold miner © ©Newmont Mining
Giant mining mergers have a poor track record

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.

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 would come 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”.

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 total of $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 mind back 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?

Investors should also keep in mind that Barrick Gold’s CEO Mark Bristow is “new at the helm”, says Clara Ferreira Marques on Breakingviews. What’s more, “giant mining deals have a poor track record”. If there are really big savings to be made from working together in Nevada, surely “a joint venture would be a far more sensible way of getting there”, rather than this “daring” and “opportunistic” merger.

There is only a “glimmer” of possibility that 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

Cutting costs is great, says CNN’s Paul La Monica. But as Kraft Heinz is finding out the hard way, it can be counterproductive if it means that a firm forgets to “make tasty products that people actually want to buy”. Ever since Kraft and Heinz merged in 2013, Kraft Heinz has been concentrating on trimming overheads to boost margins. But it may now have gone too far. The stock plunged by more than a quarter early this week after the group reported a big fourth-quarter loss owing to a writedown of the value of its Kraft and Oscar Mayer brands. It also cut its dividend and disclosed an Securities and Exchange Commission probe into its accounting.

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. It has now had to swallow a $3bn impairment charge on its 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 has left the conglomerate wrong-footed.

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

City talk

General Electric (GE) shares jumped by 6% after CEO Larry Culp “took his boldest step yet to rescue the troubled behemoth”, says Rick Clough on Bloomberg. It involved arranging to sell GE’s bio-pharmaceutical business to Danaher Corp “for $21.4bn”. Previous attempts to streamline the conglomerate and help it out of one of the worst slumps in its 127-year history have included an overhaul of the ailing power-equipment business, cost cuts and a divestiture of GE’s locomotive unit.

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.