Of wild cats, war chests, poison pills
HudBay-Augusta takeover battle had it all
The takeover battle between HudBay Minerals Inc. and Augusta Resource Corp. had a bit of everything: a feud over permitting, an unprecedented regulatory decision on poison pills, a warchest filled by an over-subscribed equity deal, and the surprise walk-on appearance of a cute wild cat.
But for HudBay’s financial advisers, the keys to victory were convincing shareholders that Augusta’s permits for its Rosemont copper project were not coming anytime soon, and that Augusta faced serious financial risk in the meantime.
“We did have a view that Augusta was still at least a year and a half away from getting approvals for mine construction when we launched,” said Jason Attew, managing director at BMO Capital Markets, which advised HudBay. “That was certainly different to what Augusta was saying.”
Toronto-based HudBay had Augusta in its sights for a few years. It first invested in the junior miner back in 2010, shortly after David Garofalo became chief executive.
By early 2014, HudBay was keen to make an acquisition, though it hadn’t singled out Augusta as its prime target. That January, the company raised $173 million in a bought deal financing, giving it some extra financial flexibility to develop new assets. BMO and GMP Securities led the equity offering, which was over-subscribed.
It didn’t take HudBay long to zero in on Augusta after that. On Feb. 9, 2014, just 10 days after the equity offering closed, HudBay launched a $428-million hostile bid for the junior company, with BMO and GMP acting as financial advisers.
Augusta shares immediately jumped above the offer price, as investors and analysts hoped for a takeover war. But HudBay and its advisers doubted that there would be any competition.
The main reason was permitting. Augusta was telling the market that it should obtain all the necessary permits to build Rosemont, which is located in Arizona, in the first half of 2014. HudBay thought that timeline was far too optimistic, and it figured rival bidders would be deterred as long as there was permitting uncertainty.
HudBay’s advisers also pointed out that Augusta was in dire financial straits, with almost no cash on its balance sheet and a US$109-million loan coming due in the summer. It warned investors that Augusta might have to dilute shareholders heavily to stay afloat.
And finally, HudBay’s 16% minority stake in Augusta was another good tool to deter rivals.
But even if HudBay correctly called Augusta’s bluff on the permitting, there was another problem to overcome: Augusta’s shareholder rights plan, or poison pill.
Historically, Canadian securities commissions have viewed rights plans as temporary measures that should be quickly struck down once the target company has studied its alternatives. But recently, they have given rights plans more weight when they are approved by shareholders. In the case of Augusta, its shareholders voted in favour of the rights plan on May 2, right when HudBay hoped to strike it down in a hearing at the British Columbia Securities Commission (BCSC).
That set the table for an interesting meeting. Augusta’s counsel argued the rights plan was clearly supported by shareholders, while HudBay’s counsel said the fair thing is to strike it down so that shareholders have a chance to rule on the takeover bid.
Ultimately, the BCSC took the middle ground. It let Augusta keep its poison pill in place until July 15, a whopping 156 days after HudBay launched the offer (and past the date that Augusta claimed it would have its permits). At that point, the pill would be struck down as HudBay requested.
“It was a graceful resolution from everyone’s perspective,” said Jonathan Lampe, a partner with Goodmans LLP who represented HudBay at the hearing. “What it did was highlight the potential to get different lengths of time [for rights plans] depending on the circumstances.”
The Canadian Securities Administrators are now pondering rule changes that would require hostile takeover bids to be open at least 120 days. That would give target boards significantly more time to evaluate their options, which is precisely what Augusta wanted.
The BCSC decision gave Augusta some breathing room. But the company didn’t have its permits, and its stock price was drifting down towards HudBay’s offer as investors started to doubt that rival bidders were coming.
And then disaster struck for Augusta in the unlikeliest of forms: an ocelot.
The wild cat was spotted around the Rosemont project in late May. It is highly unusual for ocelots to be sighted as far north as Arizona, and as a result, the U.S. Forest Service requested a new round of consultations before permitting could be granted.
Any hope Augusta had of meeting its permitting timeline was finished right there.
“I didn’t know what an ocelot was,” said John Armstrong, head of Canadian M&A at BMO. “But hostile transactions are all about shifting the momentum in your favour. And that definitely shifted some momentum towards our camp.”
Ultimately, the HudBay team did not view the ocelot as a huge deal, since they were confident that Augusta’s permits would get delayed one way or another. But it was a key catalyst that forced Augusta’s board to face reality and enter friendly negotiations with HudBay. In late June, the two sides reached a friendly deal in which HudBay agreed to buy Augusta for $555 million in stock.
It was a bumpy ride, but HudBay’s team got what it wanted in the end.
“It took longer than we expected because of what happened on the poison pill side,” said Mr. Garofalo. “But ultimately, it played out the way we thought it was going to play out because we called their bluff on permitting.”
I didn’t know what an ocelot was