Eldorado Gold Corp. aims to expand its production plans in debt-plagued Greece with an all-share bid for European Goldfields Ltd. , valuing the Yukon-based company at about $2.5-billion and disrupting a financing deal it recently struck with a Qatari investment group.
The agreement, announced on Sunday, is a 48-per-cent premium to where European Goldfields shares were trading before they soared on Dec. 6, following the company's announcement that it was in acquisition talks with "third parties."
It also comes just days before a Dec. 22 meeting during which European Goldfields shareholders were set to vote on a $750-million investment from Qatar Holding LLC, an arm of Qatar's sovereign wealth fund. The money was to develop gold projects in Greece and Romania to help make the company Europe's biggest gold producer, with annual output of 350,000 ounces.
The investment was hailed as much-needed economic injection for both European Goldfields and Greece as the country tried to resolve its massive debt crisis.
"This is good news for Greece," Martyn Konig, executive chairman and chief executive officer of European Goldfields, said of the Eldorado offer, citing Eldorado's current operating experience in the country.
"Today's transaction offers excellent value to shareholders through an immediate premium, reduced execution risk, and future upside through participation in Eldorado, a leading gold growth story with a world-class asset portfolio and a compelling dividend policy," Mr. Konig said in a statement. The company's board is unanimously recommending the Eldorado offer after reviewing "a number of proposals," he added.
It's the latest in a series of gold sector deals that have seen miners pay rich premiums and reach into riskier regions to find growth amid the world's shrinking resource base.
The offer comes as gold equities have been hammered in recent weeks, alongside a selloff in the precious metal itself, as the U.S. dollar rises due to heightened worries that Europe will fail to resolve its sovereign debt crisis.
Gold fell 6.6 per cent last week, closing Friday at about $1,599 (U.S.) an ounce in New York, down 16 per cent from a record of just above $1,900 in September.
While gold has stumbled, the physical metal continues to outperform equity markets and many investors still rely on its reputation as a hedge against inflation or currency devaluation.
Shareholders of European Goldfields, which is listed on both the Toronto and London stock exchanges, are being offered 0.85 Eldorado shares and $0.0001 in cash, valuing their shares at $13.08 each based on Friday's closing prices.
European Goldfields stock closed at $11.84 on the Toronto Stock Exchange on Friday, down considerably from an all-time high of $17.37 in February and up from a low of $8.12 in late September, just before Qatar came in with its investment plan and boosted the stock.
Vancouver-based Eldorado closed at $15.39 on Friday, well off its all-time high of $21.95 in September, around the time gold was at its record peak.
Eldorado, with a current market capitalization of about $8.5-billion, has been eyeing an acquisition of European Goldfields since the fall of 2010. Centerra Gold was also recently rumoured to be considering a bid, but an offer would have been more challenging given its much smaller market cap of $4.4-billion.
Eldorado, which has operations in Greece, Turkey, China and Brazil, is hoping the assets of European Goldfields will help it meet its goal of increasing production to about 1.5 million ounces by 2015, up from about 650,000 ounces forecast for this year.
"We are extremely pleased to have reached this mutually beneficial transaction," Eldorado CEO Paul Wright said in a statement, saying the merged company will create a "leading low-cost, high-growth intermediate gold producer."
European Goldfields has the Skouries and Olympias gold projects in Greece as well as the Certej project in Romania, with gold reserves estimated at about 10 million ounces. It also generates cash flow from its 95-per-cent-owned Stratoni lead-zinc-silver mine in Greece.
It's the first takeover offer from Eldorado since it was outbid by rival Goldcorp Inc. for Andean Resources Ltd. last year. Eldorado pulled its $3.4-billion offer for Andean in September, 2010, saying it wanted to avoid a "value destroying auction."
The deal needs approval of two-thirds of European Goldfields shareholders at a meeting scheduled for mid-February. A majority of Eldorado shareholders must also approve the arrangement given the level of its shares involved in the transaction.
European Goldfields has requested this week's vote on its Qatar investment be postponed until after the February votes on the Eldorado offer.
If the deal is approved, current Eldorado shareholders will hold about 78 per cent of the combined company, while shareholders of European Goldfields will hold approximately 22 per cent on a fully diluted basis.
Eldorado has the right to match any better bid that could come in for European Goldfields, and both parties must pay a $75-million break fee.
If the deal goes ahead and the Qatar financing is cancelled, European Goldfields is expected to have to pay a $7.5-million break fee to Qatar Holding.
Qatar Holding, which is the largest shareholder in European Goldfields with a stake of just under 10 per cent, said in early October that it would provide a $600-million seven-year loan to the company, and unsecured loan notes with warrants for $150-million, amid ongoing financial turmoil in Greece.
The investment, which came at a crucial time for both European Goldfields and Greece, was touted by former Greek prime minister George Papandreou as evidence that his struggling nation is still a good place to invest. (Mr. Papandreou resigned last month.)
Qatar Holding, owner of Harrods department store in London, has been eyeing investment opportunities in Greece, and its parent, Qatar Investment Authority, has been an aggressive buyer of high-profile foreign assets in recent years including Volkswagen, London Stock Exchange, Miramax Films and French soccer team Paris Saint-Germain.
The advisers for European Goldfields are BMO Nesbitt Burns Inc. and Lazard & Co. Ltd. and its legal counsel is Stikeman Elliott LLP. Eldorado's financial advisers are GMP Securities and Merrill Lynch and its legal counsel is Borden Ladner Gervais LLP.