Polyus Gold and Polymetal - deal or no deal?

By bne IntelliNews January 27, 2012

bne -

Major Russian gold miners Polyus Gold and LSE-listed Polymetal are reported to be in talks over resurrecting a possible merger. However, based on the former's questionable track record on M&A announcements, analysts speculate the news may simply be a leak intended to drive up Polyus' share price ahead of a new equity offer.

Should it happen, the merger would move Polyus, co-owned by oligarchs Mikhail Prokhorov and Suleiman Kerimov, onto the FTSE-10 index. Polyus' share price jumped on the news as much as 11% and Polymetal jumped 10% in London, according to Bloomberg. The newswire's sources said that the deal was being discussed on the level of the companies' oligarch owners rather than management. Polymetal is co-owned by Czech oligarch Petr Kellner and Russian Alexander Nesis.

Polymetal flipped its domicile from Russia to Jersey to secure a FTSE listing in October 2011, while Polyus has been looking for a merger since 2010, suggests Vedomosti. In fact, the company has kept busy announcing various planned M&A moves and restructuring deals since Prokhorov took control.

In the event that the merger actually goes ahead, Polyus would not only gain a FTSE listing in London, but also benefit from Polymetal's expertise in launching new mines. The merged company would be the world's sixth largest gold producer by volume, mining two-thirds of Russia's gold.

In terms of possible synergy, some analysts point to Polyus Gold having a better asset portfolio (80m oz of reserves, with world-class deposits), whilst Polymetal has a superior operational corporate track record, but only 15m oz of reserves, including many minor deposits. Others see little synergy suggesting instead that the merger could be an exit strategy for Polyus' oligarch owners. "Major Polyus Gold shareholders Suleyman Kerimov and Mikhail Prokhorov could use a merger as a way to cash out and step down from the company," posit Uralsib analysts.

The last time such a merger was discussed between core shareholders, they agreed to run it in principal, but failed to agree a price, with Polymetal's shareholders insisting on a premium for their company. "Since then, Polymetal's potential premium has likely increased moderately due to the successful re-domiciliation, FTSE 100 inclusion and output growth," write VTB analysts. "We should also keep in mind that Polymetal is now a UK company with above 50% free-float, where minorities' opinion does matter," they add.

Alfa analysts display the most skepticism. "The most likely reason to leak this news is to drive up Polyus's stock price ahead of a sale of primary and secondary shares. This pattern has a recent historical precedent: In December 2010, Prokhorov became CEO and announced his intention to merge with a global major. The next day Prokhorov sold $100m in stock. We believe a deal is less likely than no deal," Alfa conclude.

It's also worth noting that, due to Polymetal's registration in the UK, any merger would require approval of the state committee on foreign investment, which is headed by Prime Minister Vladimir Putin. Mikhail Prokhorov is currently set to run against Putin in March's presidential elections.

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