The term ‘merger of equals’ is one that gets thrown around a lot, as the acquiring company attempts to soften the impact of its takeover. But when Alamos and AuRico proposed their tie-up, these gold extraction outfits were like mirror images of each other. One had cash, the other assets and a need for cash. So equally matched were these counterparts that neither was willing to pay a premium for the other’s shares. That might have made for a good press release, but it left the merger vulnerable to interlopers willing to offer either company a better deal.
Lexpert: This was a fascinating deal in the gold sector — a merger of equals, with no premium paid to either side, structured as a reverse takeover. And there was even a spin-out of a separate public entity. What was driving all of this?
Kevin Morris (Torys LLP, for Alamos): The Alamos-AuRico merger had long been a good idea, and the time came to execute on that good idea. Alamos had available cash and mature assets; AuRico had assets in development and a need for cash.
Krisztián Tóth (Fasken Martineau DuMoulin LLP, for AuRico): Each party brought a strength to the deal where the other was not as strong. AuRico had great mines in stable jurisdictions, but had some debt and less cash. Alamos had a mine and attractive development projects in Turkey, a good amount of cash and no debt. The merger resulted in the creation of a larger, more diversified company with a portfolio of high-quality assets located in stable jurisdictions with a stronger financial position.
Lexpert: Did low gold prices prompt these companies to increase scales of economy?
Tóth: This was a true merger of equals with no premium paid, so the price of gold was not as significant.
Morris: The key driver of the deal was the logic of marrying a company with cash and in need of further assets to develop, Alamos, with one which had assets to develop and was not as cash-rich, AuRico.
Lexpert: Did the deal teams know each other pretty well?
Morris: I’ve known [chief executive officer] John McCluskey, [chief financial officer] Jamie Porter and the management team at Alamos for several years. On the legal side, I’ve known [team leader] John Turner and Krysztián at Fasken for many years. We’ve always had a good working relationship. Nils Engelstad joined Alamos as the new, sole in-house lawyer just after the merger agreement was announced. It was quite a baptism for Nils — not what he’d signed up for, just much more exciting.
Lexpert: That must have been an unnerving experience, Nils.
Nils Engelstad (General Counsel, Alamos): I joined Alamos on April 27. The deal had just been announced two weeks earlier, and when I had agreed to join, I was unaware of the transaction. The biggest challenge was getting up to speed on the two companies. When the deal closed, I had been in the position for only two and a half months. The assets and the people on both sides of the deal were equally new to me. In fact, some elements are still new to me. It was an incredibly interesting challenge.
Lexpert: There was also an interesting wrinkle in this deal, where the copper assets were hived off into a separate company, which today retains the AuRico name. Why was it necessary to spin out these mines?
Tóth: The complexity of the structure was primarily tax-driven. It was part of the negotiations. Each company recognized that the combined entity would have a number of high-quality development projects. By spinning out the Kemess Assets and certain royalties into AuRico Metals, significant value could be unlocked that might otherwise not be fully recognized in the combined company.
Morris: It was designed to unlock shareholder value on assets that the market might have been undervaluing.
Lexpert: The term “merger of equals” is used loosely, but Alamos and AuRico had almost exactly the same market cap. How did this fact enter the equation?
Tóth: It’s rare to have a true “merger of equals” transaction, and the spin-out added to the technical complexity.
Morris: Here we had two companies with almost the same market value, both listed in Canada and the US, and no premium was paid. This was a real merger of equals. We had to consider what types of deal protections would be available and warranted. Both sets of shareholders had to approve the deal. New securities of two new companies – MergeCo and SpinCo – were issued to shareholders of both prior companies, with prospectus-like disclosure for both new companies — in both Canada and the US. This type of complex transaction, which involves large teams touching on so many areas of business law, and involves working with top-level management teams and directors, is one of the best things about practising corporate law. It was a terrific transaction to be involved in.
Lexpert: Was there ever any fear that the deal could unravel?
Tóth: As the deal was a true merger of equals, there was an increased risk of a competing deal emerging.
Morris: Given that no premium was paid to either Alamos’s or AuRico’s shareholders, the deal team knew the transaction was always vulnerable to an interloper who was willing to offer a significant premium for either company’s shares. Ultimately that did not happen, and we can only speculate as to why.
Lexpert: Did the threat of an interloper, as you put it, put pressure on the deal teams to get it out faster?
Morris: Given the spin-out and other complexities, the transactions had to be effected by way of a plan of arrangement. That process dictated much of the timing of the deal — there had to be shareholders meetings for both companies, held in accordance with the timetable dictated by corporate and securities laws. So the deal was at risk until those shareholder meetings were held.
Lexpert: Shareholders voted 98.8% in favour of this deal, so clearly there was little resistance from that side of the table. Was there any sense of achievement from having drawn that much support? Did shareholder support even come into the legal advisory work?
Morris: The result of the shareholder vote was very positive. Neither company’s shareholders received a premium, yet both sets of shareholders strongly supported the transaction. Shareholders saw the merit in the transaction. As outside counsel, we weren’t involved in settling pricing terms of the deal. Nonetheless, it is a rewarding experience for counsel to be involved in such a well received and overwhelmingly supported transaction.
Tóth: The overwhelming support from shareholders and the street was appreciated by all involved.
Lexpert: What about the egos that invariably come into play? Somebody had to be the CEO of this new company. Was that ever an issue?
Tóth: The management team and board of each company did not let ego come into play. Each of them realized that the merger of equals was in the best interest of shareholders and that the deal made sense.
Engelstad: An interesting aspect of the merger process was the extent to which Alamos and AuRico management committed to careful post-merger integration planning. I believe management will look back at this planning, including as it pertains to consolidation of in-house legal services, as a key success factor. For a management team and board to work together as well as they do within mere months of a transformational transaction such as this truly speaks to the foresight and planning that went into ensuring continuity and capacity at both the board and executive management level.
For a summary of the deal that includes a full list of legal advisors, click here.
