October 26, 2009Goodby Ruukki, Hello Ruukki: Sylvania Resources...

October 26, 2009

Goodby Ruukki, Hello Ruukki: Sylvania Resources Unshackles Itself From A Cumbersome Merger.

By Alastair Ford / www.minesite.com

“It just got very, very complex”, says Terry McConnachie when he phones up Minesite to assist in a quick post-mortem of what went wrong with the planned merger of chrome specialist Ruukki with his very own Sylvania Resources, a company with platinum exploration projects and chrome retreatment operations. The fit looked simple enough when the deal was done - Sylvania would give Ruukki a leg up into the platinum space, while Sylvania got access to a proprietary “DC” smelter controlled by Ruuki.
But, even putting lawyers aside for one second, this was a deal that came with several caveats.

First, Sylvania itself was in the process of acquiring two other companies, Great Australian and Pan Palladium. Second, Ruukki came with all sorts of additional extras, including a saw-mill business, a Finnish listing, and operations in Turkey and Europe. The fit there with Sylvania was always less than clear. As Terry McConnachie says, “it would have been like buying a sheep just to get some wool”. The only thing that really fitted with Sylvania’s South African-focused operations was Ruukki’s Mogale Alloys business, with its four furnaces and 96MVA (megavolt ampere) smelting capacity.

So there was a lot of sense in a Ruukki-Sylvania combination, and a lot to mitigate against one too. What really raised eyebrows initially, though, was the timescale. Due to a wide range of external factors, including the ongoing acquisitions, this was a deal that was likely to take a year to complete. A lot can change in a year, and a lot can go wrong. That timescale allowed plenty of time for things to unravel, and unravel they duly did. The double bureaucracy of having to run major – and even minor – decisions past two boards began to become a serious hindrance to getting things done, while there was also a legal pressure on the companies not to deploy too much cash on testing or processing for fear of upsetting the carefully established comparative valuation ratios – set at 1:81 in favour of Ruukki the official documentation.

When that began to become apparent, as the market tried to come to terms with the diverse and disparate elements that would have gone into a combined Ruukki-Sylvania, the progenitors of the combination also began to have doubts. Terry McConnachie is perhaps best placed of anyone to comment, given that as well as heading up Sylvania he’s also on the board of Ruukki, and he emphasizes that Sylvania’s relationship with Ruukki remains strong. He’s candid, too, though. From Sylvania’s perspective, he says, “with hindsight we were doing the deal only to get hold of a furnace”. And he admits that perhaps the structure of the deal could have been improved on – a straightforward offer would have been better than the scheme of arrangement that was eventually put on the table.

Hindsight is a wonderful thing, as they say, but what shareholders will now be interested in is where things go from here, especially given that Sylvania’ shares fell off a small cliff when the deal was scrapped, dropping by 20 per cent from 74p to 59p. Terry has plans for an imminent market update, not only on where things stand with Ruukki, but also on how the new acquisitions are bedding down. On the first point, he says, Sylvania would still hope to do some sort of deal with Ruukki regarding its South African processing facilities. Ruukki and Sylvania are, he says, “extremely close”, and there’s no doubt that Sylvania will need to align itself with a smelter fairly soon. And Sylvania’s shares could come onto the table again, when it comes to working out a mutually beneficial arrangement.

In any case, it’s certainly not in Sylvania’s interest to rock the boat now that it’s on its own again. Ruukki, it might be argued, needs Sylvania less, but still, if the parting of the ways has been as friendly as Terry seems to imply, that’s no reason why a deal won’t get done. And if it’s not to be, then Terry hints that since the deal was put together some alternative options for Sylvania have subsequently presented themselves.

Be that as it may, Terry has every expectation of remaining on the board of Ruukki for a good while yet, and keeping the relationship alive. Sylvania, he insists, is in great shape. The due diligence conducted to satisfy Ruukki has shown, he argues, that all the elements of Sylvania’s business, including its contracts with Samancor, are strong. The company is comfortably profitable at an operating level, and poised for growth. And investors who want to know more after the imminent update is released won’t have long to wait. Terry plans an extensive roadshow in London and Australia before the year is out.