TORONTO/WARSAW Polish miner KGHM KGHM.WA has agreed to buy Canada-based Quadra FNX QUX.TO for about C$3 billion ($2.96 billion) in a move to boost its copper production in jurisdictions where political risk is low.
The friendly, all-cash deal will give KGHM control of Quadra's Sierra Gorda copper project in Chile, one of the world's largest copper projects still in the planning stage. KGHM would also take control of other assets in Canada, Chile and the United States.
"KGHM will benefit greatly from Quadra FNX's high-quality management team and employees, and we plan to make Canada our base for further growth in the Americas," said KGHM Chief Executive Herbert Wirth in a statement.
KGHM, one of the world's top copper and silver miners, has agreed to pay C$15 a share for Quadra - a 32 percent premium to Quadra's closing price on the Toronto Stock Exchange on Monday.
Quadra's shares jumped as high as C$16.04 following the news, as some investors and analysts expect a higher bid to emerge.
"The C$15 bid is a bit light," said Stifel Nicolaus analyst George Topping. "We're a 'buy' on the stock with a C$15.75 target price, but that's discounted from the net asset value of C$20 per share, so on a net-asset-value basis, it's a low bid."
KGHM's Warsaw-listed shares tumbled more than 10 percent following the news, as investors fretted that the deal could force the miner to scrap its dividend payout, as the miner is funding the takeover with its available cash resources.
"The price KGHM is paying is quite a lot higher than the target's market price, and secondly these assets are not of the highest value. The argument is that spending 10 billion zlotys ($2.99 billion) will mean there will be a lot less money for a dividend," said Tomasz Duda, an analyst at Ipopema Securities in Warsaw.
Wirth in a television interview reassured investors that there were no plans to scrap the dividend at this time.
"I think there will be a dividend, and it will be a fair one," Wirth told TVN CNBC channel in an interview, adding the management's proposal for the payout should come in the range of 30-50 percent of the company's 2011 profit.
KGHM expects the takeover of Quadra to close in the first quarter of 2012.
The deal, worth about C$3.5 billion when the assumption of debt is included, will boost KGHM's output by 25 percent or 100,000 tonnes in 2012, and possibly by 50 percent ultimately.
Quadra FNX said its board is advising its shareholders and warrantholders to vote in favor of the KGHM bid. All of Quadra's senior officers and directors intend to vote their shares in favor of the deal.
The deal requires the support of at least two-thirds of Quadra's shareholders and the backing of Canada' competition watchdog. It also faces scrutiny under the Investment Canada Act, which requires that any large foreign acquisition has a 'net benefit' to Canada.
BMO Capital Markets acted as Quadra's financial adviser on the deal, with Blake, Cassels & Graydon LLP acting as legal counsel to the company and its board.
BNP Paribas and Rothschild acted as KGHM's financial advisers on the deal, with Davies Ward Phillips & Vineberg LLP, and Gide Loyrette Nouel acting as legal counsel.
($1 = 1.0131 Canadian dollars)
($1 = 3.3006 Polish zlotys)
(Additional reporting by Julie Gordon in Toronto and Agnieszka Barteczko in Warsaw; Editing by Will Waterman and Frank McGurty)