Citi's all-encompassing role in Sibanye Gold's acquisition of Stillwater Mining helped the South African company overcome numerous hurdles in a deal complicated by the country's political uncertainties, among other factors. Edward Russell-Walling reports.

Citi team

It makes good sense, but it happens surprisingly seldom in major deals. When Sibanye Gold acquired fellow metals miner Stillwater Mining earlier in 2017, cheerleader Citi was involved in every step of the complex transaction. It introduced the parties, advised Sibanye on the acquisition, co-underwrote the interim finance, and then co-led sizeable rights and bond issues to refinance the bridge. 

Sibanye was spun out of Gold Fields of South Africa in 2013. It took with it a number of the group's oldest, deepest gold mines, and has since added more local gold and platinum group metal (PGM) mining assets. Today it is South Africa's largest gold producer.

Palladium performance

Given the political and labour uncertainties that surround South African mining, however, the company has been keen to diversify abroad. It also wished to grow its presence in the PGM market, where it saw a lot of upside, particularly in palladium.

Stillwater, in Montana, is the world's largest PGM miner outside South Africa and Russia, and is primarily a palladium producer. Citi had known Stillwater for some time, according to Wes Walraven, the bank's London-based global head of industrials, corporate and investment banking.

"A new management team was improving the cost position of the Stillwater mines and developing the neighbouring Blitz project," says Mr Walraven. "We introduced them to the Sibanye management team at the Denver Gold Show in October 2015."

The two began a dialogue, but Sibanye had also been looking at other acquisition possibilities, notably Barrick Gold's African unit, Acacia Mining. When a mutually acceptable price for this proved elusive, the Citi team reckoned that Sibanye would come back to Stillwater and decided to show how a deal could be financed.

Cash for gold? 

Stillwater needed to be convinced that a cash deal could be done, because payment in stock was not feasible. Given their relative trading multiples, it would have been the highest cost option for Sibanye. An all-paper deal would also have been complicated by shareholder resistance, since the companies were listed on different stock exchanges. "The right mix was to pay cash and then finance a portion in the equity market," says Mr Walraven.

So, as a tactical next step, Citi issued a 'highly confident letter' ­(HCL). "This was a top-level commitment in very large size," says William Husband, a managing director in Citi's metals and mining team. "It demonstrated that Citi believed in the Sibanye management team's ability to acquire and integrate the target and that we would finance the acquisition ourselves."

The HCL was issued in July 2016. It expressed confidence that Citi could underwrite bridge finance of up to $2.5bn, and that this could be refinanced quickly in both equity and debt markets at up to $1bn apiece.

The two teams resumed discussions and began reciprocal due diligence. Once a mutual desire to do a deal was apparent, Sibanye asked if HSBC, which had worked on the Acacia project, could come in as co-underwriter on the bridge and take-out financings. Citi agreed.

To support a bid, Citi and HSBC provided a committed bridge loan. This included providing a backstop for Sibanye's existing bank debt, since these lenders would need to provide consent once a transaction was announced. "So our final commitment at announcement in December 2016 was $3.275bn, with $2.65bn as the acquisition component and $625m to cover the theoretical risk of [not] obtaining existing lender consents," says Tom Lambourn, director, Europe, the Middle East and Africa (EMEA) loans and acquisition finance at Citi.

While all this was going on, the gold price fell and the rand strengthened, weakening Sibanye's position on a relative basis. "When the two started discussions in the summer, Sibanye had been more than twice the market cap of Stillwater," says Matthew Kenney, a director in Citi's EMEA metals and mining team. By acquisition close, the two were nearly equal.

An unsteady start 

Stillwater eventually agreed to an all-cash offer of $18.12 a share, a 23% premium to the prevailing price, valuing the business at $2.7bn. That was more than Sibanye's own market value, then about $1.9bn, and represented a high earnings before interest, tax, depreciation and amortisation multiple. "The growth story at Blitz made traditional valuation metrics challenging," Mr Kenney maintains. "Sibanye believed the market did not fully reflect the cash flow upside from this world-class asset."

The deal was supported by Sibanye's two largest shareholders – Chinese consortium Gold One and state pension fund Public Investment Corporation – which together owned 29% of the bidder. It was announced on December 9, and Sibanye's shares promptly fell by 15%.

That was partly because this was Sibanye's first move abroad, with a target now equal to itself in size. But it was also accompanied by news of a $750m rights issue to fund the acquisition. Mr Walraven acknowledges that the market's initial reaction was negative, but says that by the time the transaction closed in May 2017 investors were starting to like it, as management explained the deal's rationale. "Sibanye's shares began to outperform its peer set," he recalls.

In January, work began on syndicating the bridge finance with relationship banks and new lenders. This was helped by the knowledge that public market transactions to take out the bridge were in the pipeline. Banks knew that if they didn't participate in the bridge, there was no chance of participating in subsequent capital markets deals. The syndication closed in mid-February, and in April Sibanye shareholders voted in favour of the acquisition, and a $1bn rights issue.

"There were 16 banks in the syndicate, with an oversubscription of more than $1bn," says Mr Lambourn. "That was a big vote of confidence early on in the process."

Down the bridge 

As it happened, consents for a change of control on existing debt were forthcoming, so the HCL backstop could be cancelled, and bridge financing was back down to $2.65bn. The Stillwater shareholders were paid by drawing down on the bridge, and the business of refinancing began.

"We started work on the rights issue five months before the terms were announced on May 18," says Paddy Evans, Citi managing director, equity capital markets. The $1bn offer was equivalent to more than 50% of the pre-launch market cap and, as such, was a significant capital raise. It would be the third largest rights issue ever in South Africa and the largest for an acquisition.

The rights were offered at a 40% discount to the theoretical ex-rights price – "in line with market standard", according to Mr Evans – and a 60% discount to the market price. There was a 97% take-up and an oversubscription of nearly five times the value of the whole deal.

With the equity raising out of the way, attention turned to the bond issue, which would be Sibanye's first. "Gold Fields was known to the bond markets, and Sibanye's assets were known to the bond markets, so it helped that this was not a new story," says Tommaso Ponsele, Citi director, central and eastern European, Middle Eastern and African debt capital markets.

The bridge size had been underpinned by certain assumptions on Sibanye's eventual debut credit ratings. With Citi as ratings adviser, these were confirmed ahead of the June bond issue as Ba2 (Moody's) and B+ (Standard & Poor's). "Standard & Poor's has been more conservative on most South Africa-related mining ratings," says Mr Ponsele.

A spanner in the works? 

Pricing of the issue coincided with the unveiling of a new Mining Charter, in which the South African government insisted that black shareholders should own at least 30% of local mining companies. Though this was suspended a month later, it was clear that the industry and the mining minister were at odds. "The announcements were unhelpful, and probably cost the company an extra 30 to 40 basis points," says Mr Ponsele.

Nonetheless, the dual-tranche issue priced at the tight end of guidance. Issued by Stillwater with Sibanye as guarantor, there was a $500m five-year slice with a 6.125% coupon and a $550m seven-year tranche paying 7.125%. Oversubscription of about two times allowed the latter to be upsized by $50m.

"We were so focused on the deal that we only realised later this was the largest corporate bond debut ever out of Africa," says Mr Walraven.

In August, Sibanye disappointed its shareholders by announcing it would not pay a dividend after posting its first loss. Critics blamed its growing debt, saying it had overpaid for Stillwater. Sibanye responded by starting production from Blitz three months ahead of schedule.

"Platinum and palladium prices are driven by emerging technology," says Mr Walraven. "It's the good growth outlook for those metals which drove this deal."

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