Palladium Producers Offers 279% Premium For Copper And Gold Company — BHP Billiton Pays 61% Premium For Gas Producer — Gas Producer Sued By Shareholders Over Claims The Offer Undervalues the Company

Another very big warning sign is given to us by the M&A activity of the recent week. Not only M&A has been extremely high — typical sign of euphoria — but the last few deals are raising some serious red flags.

The reason? Well, we already knew that most of the Chinese companies are doing nothing but funneling money under the table into real estate speculation. This is an alarming sign of real estate bubble in China. What is happening now in the commodities complex is that mining companies in one sector — particularly true for the precious metals sector — are now making bids on companies from the other sectors such as oil, gas, or base metals. This is also a sign of euphoria and extreme confidence in the future of their current business.

Just read the quotes from the reports below and try to think if these are normal statements that you would hear in a normal world — or after a cocktail party when people have drunk too much punch...

And the result? Shareholders of companies bought at inflated prices after 2.5 years of a massive bull market manage to complain and find the deals to undervalue the companies:
Petrohawk Energy Corp. was sued by a shareholder over claims its proposed $12.1 billion cash sale to BHP Billiton Ltd. undervalues the company. [...] The offer is 61 percent more than Houston-based Petrohawk’s average price over the past 20 trading days
BHP to Acquire Petrohawk for $12.1 Billion to Secure Gas
July 15 (Bloomberg) -- BHP Billiton Ltd., the world’s largest mining company, agreed to buy Petrohawk Energy Corp. for about $12.1 billion in cash in its biggest acquisition, betting natural gas demand will gain in the U.S.

Melbourne-based BHP will pay $38.75 a share using cash and debt, the companies said in a statement today. That’s 61 percent more than Houston-based Petrohawk’s average price over the past 20 trading days and compares with the 25 percent average premium in 17 deals worth at least $5 billion for oil and gas producers in the past five years, Bloomberg data show.
The premium is ‘probably a little bit more than expected,” Cameron Peacock, market analyst at IG Markets Ltd. in Melbourne, said by phone. Paying in advance for future growth “is something the analysts often don’t like to see,” he said.
Still, “shareholders may well have some concerns, considering BHP is planning on spending a total of about $20 billion on an entirely new business that they don’t know that much about,” he said.

Formed in 2003, Petrohawk expanded by acquiring companies including Missions Resources Corp. in 2005 and KCS Energy Inc. in 2006 before it started “aggressively” buying shale acreages in 2007, according to the developer’s website. It has about 650 employees.
BHP will become the seventh-largest independent upstream oil and gas company based on total resources, BHP said in an investor presentation, citing Wood MacKenzie Consultants Ltd. The U.S. gas market is the world’s largest, BHP said.

“Petrohawk are extremely well regarded as innovative, but aggressive operators,” Prasad Patkar, who helps manage the equivalent of $1.7 billion, including BHP shares, at Sydney- based Platypus Asset Management Ltd. said by phone. “You might find that they have made a very smart acquisition.”

The proposed deal would be the biggest all-cash takeover by any Australian company, according to Bloomberg data. [...] 
BHP is paying 18.4 times earnings before interest, tax, depreciation and amortization, versus a median of 13.5 times for seven purchases by producers over the past five years, the data show. [...] 
BHP joins Exxon Mobil Corp. and Chevron Corp. in ramping up acquisitions in gas prospects previously considered too costly and difficult to exploit. Shale-rock formations require injection of water, sand and chemicals to release gas. Environmental groups have opposed using the process called hydraulic fracturing, or fracking.
Petrohawk Investor Sues Over $12.1 Billion BHP Acquisition
July 19 (Bloomberg) -- Petrohawk Energy Corp. was sued by a shareholder over claims its proposed $12.1 billion cash sale to BHP Billiton Ltd. undervalues the company.

The deal creates a conflict of interest on the part of directors that “colors their ability to make an unbiased decision” regarding the fairness of the proposal, shareholder Astor BK Realty Trust said in the complaint filed yesterday in Delaware Chancery Court in Wilmington. Astor is seeking to represent all Petrohawk shareholders in its request for a court order barring the transaction.

“The board’s acceptance of BHP’s offer demonstrates the company’s all-too-eager-to-sell mentality,” lawyers for the trust said in the complaint.
Petrohawk Chief Executive Officer Floyd C. Wilson will make about $152 million from the deal on his roughly 3 million shares, and will likely be eligible for a $10.4 million change- of-control payment, according to the complaint. Stock options could add $24.85 million, according to the complaint.

“This substantial conflict of interest casts doubt on the board’s ability to make an unbiased decision regarding the benefits of the proposed transaction to Petrohawk’s shareholders,” Astor said in the complaint.

The deal also includes onerous and preclusive protection devices including a $395 million termination fee if Petrohawk decides to pursue a competing offer, lawyers for the trust said in the complaint.

The trust is seeking unspecified damages in addition to a court order barring the transaction.
Boom Turns Bust for Stillwater Holders on Copper Deal: Real M&A
July 14 (Bloomberg) -- Stillwater Mining Co. is so sure commodities will keep surging that it’s willing to spend more than the Montana palladium producer itself is worth to buy and develop copper and gold projects in Argentina.

Stillwater, which offered to buy Peregrine Metals Ltd. for $487 million in cash and stock this week, projects it will cost as much as $2.5 billion to develop the Altar project in western Argentina over the next seven years, Chief Executive Officer Francis McAllister said on a conference call. The combined cost is about a billion dollars more than the Billings, Montana-based company’s market value, according to data compiled by Bloomberg.

The takeover will hand shareholders of Vancouver-based Peregrine a more than threefold gain after extracting from Stillwater the second-largest premium for any mining acquisition in the world, data compiled by Bloomberg show. While Stillwater is betting that it can profit from diversifying away from palladium as copper approached a record and gold climbed to an all-time high this week, the company’s shares slumped 23 percent since the deal was announced through yesterday.
Stillwater -- once a unit of OAO GMK Norilsk Nickel, Russia’s biggest mining company -- gets more than half its revenue from palladium and platinum. Those precious metals are used in catalytic converters to make exhaust fumes less toxic.
Based on Stillwater’s closing price of $23.72 on July 8, the deal valued Peregrine Metals at $3.28 a share, the statement said. That’s 279 percent higher than the target’s price in the 20 trading days before the deal was announced, according to data compiled by Bloomberg. The premium is the second-highest for any announced deal over $100 million in the mining industry.
I’d like to give them the benefit of the doubt that they did their due diligence and they know something that the rest of us don’t,” said Rick de los Reyes, a manager at T. Rowe Price Group Inc. in Baltimore, which oversees about $510 billion including Stillwater shares. “But it’s hard to believe the market is so inefficient that it’s pricing Peregrine at a huge discount.”
“To get into a different field from what they know, it’s got me scratching my head,” said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages $14.8 billion. “The easy money in a lot of the metals has already been made.”
“This is a challenge, because they’ve gone into a geography they’ve never gone into before,” he said. “You have this nice little pocket in Montana, and that’s cool, because you can isolate your opportunities, you can isolate your risks.”

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