European Goldfields mulls Qatari fallback option

LONDON Mon Dec 19, 2011 5:12pm EST

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LONDON (Reuters) - European Goldfields EGU.TO EGUq.L, which has agreed to a C$2.5 billion ($2.4 billion) takeover by Canadian group Eldorado Gold (ELD.TO), is hoping to keep an investment deal with Qatar's sovereign wealth fund as a fallback option.

Qatar Holdings agreed in October to provide a $to back the deal when they vote in February.

"All we are doing with the 600 million project financing loan to European Goldfields, which has development stage assets in Greece and Romania, in its first investment in a gold miner. It also provided a $150 million loan note and a related warrant issue, and became a major shareholder, with a 9.9 percent stake.

Eldorado's strong balance sheet means European Goldfields is unlikely to need the cash from Qatar if the takeover goes through - but it does need two-thirds of shareholders Qatari financing is postponing or adjourning the vote technically," European Goldfields' chief financial officer, Tim Morgan-Wynne, told reporters on a conference call. "We will just push the voting on the Qatari transaction until after shareholders have been able to vote on this (Eldorado deal)."

He said Chairman Martyn Konig had spoken to the Qataris, who were kept abreast of talks, and "everything is moving on track".

Qatar declined to comment on the future of the financing package or on the takeover, which could see the Gulf state make a profit on its shares. It bought the stock at an average of C$10 - below the C$13.08 per share value of the Eldorado offer.

European Goldfields shareholders had been due to vote this week on the Qatar financing. That ballot will be postponed until shareholders vote in mid-February on the proposed takeover.

The takeover requires the support of at least two-thirds of the votes cast by shareholders of European Goldfields and Qatar currently owns about 10 percent of the company's outstanding shares. The fund has not given any indication on how it plans to vote its shares.

Analysts said Eldorado's offer was broadly in line with multiples offered in the sector, though some said it failed to fully reflect the inherent value of European Goldfields' main assets, as they are not yet in production -- despite a nearly 50 percent premium to European Goldfields' closing share price on December 5, the last trading day before it disclosed approaches.

SHARES SLIDE

Shares of Eldorado were among the biggest losers on the Toronto Stock Exchange on Monday, as investors reacted to the dilution that the deal will create. The selloff also prompted a slide in European Goldfields shares on Monday.

Eldorado shares closed 12.5 percent lower at C$13.46 on the TSX, while those of European Goldfields closed 56 Canadian cents lower at C$11.28.

Analysts noted that while the deal will hurt Eldorado shares in the short term, the acquisition will be beneficial over the long run.

However, if the deal does succeed, Eldorado all but closed the door to any potentially dilutive financing plan.

"Eldorado adds financial strength to European Goldfields without the requirement for a highly diluted and costly project financing facility," Eldorado Chief Executive Paul Wright said on a conference call.

"Eldorado has the financial capacity to fully fund the development to the company's assets without the need for additional financing," he added.

RIVAL BIDS?

European Goldfields has been seen as a takeover target since it won a permit to run two goldmines in northern Greece that could turn it into a mid-tier miner and one of Europe's largest primary gold producers.

Earlier this month, the company said it had received preliminary approaches from third parties, but analysts said it was unclear if there were other buyers waiting in the wings.

"Whilst slightly on the low side versus our target price, given the friendly nature of the bid, the immediate share premium and the synergies with Eldorado, we do not expect a bidding war to break out, despite there being plenty of valuation upside remaining," Numis Securities analyst Andy Davidson said.

Davidson said he had a long-term target price for European Goldfields, which currently produces only a small amount of zinc and lead from its Stratoni operation in Greece, above 1,200 pence, once the gold projects were in production.

"We did have a number of approaches and I could not really speculate on whether we are going to have people streaming over the hills with hostile competing offers at this point," Morgan-Wynne said.

The mining sector has yet to see a long-awaited M&A wave fuelled by tumbling valuations, but analysts have said they expect to see more deals from cash-rich miners buying out smaller companies that need cash to develop their resource base.

European Goldfields and Eldorado both expect Greece, home to some of their largest projects, to back the proposed deal.

"Eldorado's very significant investment is exactly what is needed to help break the current negative cycle of austerity and bring important jobs for investment and tax revenue to Greece," said Wright in reference to the country's dire economic woes.

($1=0.6440 British pounds)

($1=$1.04 Canadian)

(Additional reporting by Karolina Kagaris in Athens and Euan Rocha in Toronto, Editing by Dan Lalor, Mark Potter and Rob Wilson)

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