ANDY HOFFMAN AND JACQUIE McNISH
Monday, May 14, 2007
Demands by Xstrata PLC for an unusually rich break fee prompted the board of LionOre Mining International Ltd. to reject a higher takeover offer from the Anglo-Swiss mining giant Monday, according to sources familiar with the talks.
Despite the rejection, one person close to the discussions said the LionOre board signalled that it was "keeping the door open" for further negotiations to amend Xstrata's offer.
The dramatic twist in the two-month-old battle for Toronto-based LionOre and its Australian and African nickel mines moved rival suitor MMC Norilsk Nickel closer to victory, with its own $5.3-billion offer.
Sources said that although Xstrata's offer of more than $24 a share was substantially richer than an earlier $21.50 bid from Russia's Norilsk, LionOre's directors balked because it called for an usually rich break fee that they feared might shut down the bidding war for the nickel company.
Xstrata was seeking a break fee equivalent to more than 4 per cent of the offer's value, according to sources.
Breakup fees are a standard consolation payment that target companies pay to friendly bidders if they change allegiance and back a rival's takeover offer. Such break fees seldom rise above 3 per cent and sources said LionOre's board was concerned that such a rich fee would deter further bidding.
The board may also have been concerned the fee could expose the company to shareholder lawsuits.
"It's higher than anyone has ever seen before and the issue is whether this puts the whole deal at risk," said a source familiar with the discussions.
Break fees are a common condition bidders often insist on. In exchange for raising the value for shareholders of the target company, they demand compensation in the event of a higher bid.
Fees on some deals have edged slightly higher than 3 per cent, but in Canada, many takeover experts said they have never seen a major transaction in which the fee exceeded 4 per cent.
Canada's largest securities regulator, the Ontario Securities Commission, has never objected to a break fee, but legal experts said a rich fee in excess of 4 per cent could prompt shareholders to protest the condition because the fee is so costly it could preclude another bidder from submitting a higher offer.
According to people familiar with the offer, Xstrata demanded the unusually high break fee because it believes it is offering such a hefty premium over Norilsk's offer that it wanted to make sure the bid wins.
Norilsk emerged as a surprise bidder for LionOre earlier this month, launching an unexpected offer for the nickel producer amid record commodity prices and a flurry of industry consolidation.
Under a support agreement signed as part of a friendly transaction between Xstrata and LionOre announced in March, Xstrata had five working days to match competing bids deemed superior by the LionOre board.
Last week, the LionOre board declared the Norilsk offer superior to Xstrata's original bid of $18.50 a share and Xstrata had until 4:30 p.m. Monday to exercise its right to match and table a new offer.
Under the terms of the support agreement, a matching or higher bid from Xstrata would automatically be deemed superior by the LionOre board. However, because Xstrata was seeking the unusually high break fee, the decision on whether to terminate or continue the support agreement with Xstrata was made much more difficult.
LIM
lionore mining international limited.
