It takes a brave board to reject a potential suitor for a second time when your share price is changing hands at one-fifth the original offer. But that's what Discovery Metals should do.
Discovery, an African focused copper miner, is expected to emerge from a trading halt this morning to reveal the details of its proposed capital raising, having borne the brunt of a pre-emptive strike from one-time suitor and largest shareholder, Cathay Fortune, and its billionaire chairman Yu Yong.
Shareholders will probably be receptive to a proposal from Yu, given that his indicative proposal in October of $1.70 cash, though slippery, is a damn sight higher than the stock's last trading price of 34 cents. That's $870 million in total compared to a current market cap of $165.5 million – plus there's a capital raising coming.
"We are of the opinion that if Discovery progresses with the current financing arrangements, it is likely that it may be forced into receivership in the near future," the firm said in a letter to shareholders on Wednesday.
Cathay holds 13.7 per cent of the register, but stands to end up with as little as 5 per cent if it makes good on its threat to not participate in the capital raising. It has an obvious incentive to prevent the raising if it disagrees with strategy, but talking so openly about receivership is very unusual, at least in the Australian corporate PR world.
Cathay has lobbed a proposal that appears to offer Discovery shareholders a reassuring alternative, but in truth it's a roll of the dice. They are demanding that Discovery not proceed with the capital raising being conducted by UBS and Credit Suisse. Their reasoning is that ongoing raisings will "likely" be at a lower price, given their aim of securing a bond issue refinancing structure later is unrealistic. The firm is also demanding full disclosure from the board on the company's current "critical situation", which is an unveiled accusation that the board hasn't informed shareholders.
Cathay has suggested a due diligence period of no more than 10 days so that interested bidders can take a quick look at the books and then "propose a binding cash proposal to acquire Discovery".
"To facilitate competition, Cathay Pacific is willing to make the due diligence non-exclusive and agrees not to accept any offered break fee in the proposal to be recommended by the Discovery board to shareholders," the private equity firm added.
First of all, assuming that Discovery would have to conduct capital raisings down the road at a lower price, even behind the qualifier 'likely", requires a pretty good crystal ball into the copper price.
But take the bear's argument to be solid – throwing the word 'binding' into a hypothetical discussion of a due diligence period that would ruin the company's current capital raising efforts, leaving it with little alternatives but a change of control proposal, is shameless. Nothing's binding about this pre-eminent strike from a 13.7 per cent shareholder. All you're guaranteed is that press release.
Additionally, as a 13.7 per cent shareholder, Cathay can't thwart any alternative takeover bids by making the due diligence proposal that the board hasn't agreed to non-exclusive, but it can certainly make mischief with it. In fairness that presumes it goes back on its promise not to participate in the raising.
While process towards bringing the Boseto copper project in Botswana to life and making Discovery stable with positive cash flow has been rocky, the alternative proposal requires a complete lack of confidence in the board.
Discovery shareholders will be wondering what could have been if the board had engaged with Cathay at $1.70 a share. They'll never know – Yu might have made good on it, but this column doubts it. His proposal was a flashy headline number, structured for an easy exit if needed.
If they take the bait now, the company will be a hostage to a 13.7 per cent shareholder that won't be offering anything like the original deal.
