What the banker saw: Inside story of Sibanye’s R35bn swoop on Stillwater

LONDON — Entrepreneurs who pull off the major deals get the headlines, but the heavy lifting is usually done behind the scenes. Which was clearly the case after Sibanye’s aggressive CEO Neal Froneman targeted North America’s leading producer of Platinum Group Metals (PGMs). With Sibanye’s share price falling, the Rand under pressure and the target company Stillwater surging in value, Froneman’s desire for the deal was stress tested. Ditto the appetite of the aggressive entrepreneur’s financial partners, who stumped up almost R35bn that was required to get the deal done. RMB’s Julian Grieve was in the thick of the action. Here’s the story of how Sibanye’s BHAG (Big Hairy Audacious Goal), one of the world’s biggest mining deals of 2017 went down. – Alec Hogg

This special podcast is brought to you by RMB. Julian Grieve from RMB Investment Banking joins us now to talk about the landmark Sibanye deal. Sibanye acquired Stillwater in the United States to become a truly global player in the platinum and palladium sector. With these mega deals surely there has to be a mega bank involved? When did you come into the arrangements?

We got involved in the Sibanye transactions in December 2016 – shortly after they announced the acquisition. Sibanye started to approach their relationship banks to arrange the $2.65-bn funding that they required to take this through to conclusion.

Citi and HSBC were the banks that put this deal together. Being big international banks they have the balance sheets to commit to and advise on the transaction. Then they quickly moved into the syndication of this bridging facility. We stepped up at that point in time and were effectively involved in every leg of the transaction from thereon in. We were responsible for funding the bridge itself and being an underwriter in the equity and rights issue. We then had a co-manager role on the bond takeout, which closed a few weeks ago.

How long has Sibanye been a client of yours?

Pretty much since their formation, when they were spun out of Gold Fields towards the end of 2012 and early 2013. We were one of the funders for this process that enabled them to form a standalone company. We’ve since done various transactions with them over the course of time.

Julian Grieve, RMB

However, this one, even for a bank of your size, is a substantial transaction of more than $2.5-bn. Did Neal Froneman, the CEO, talked to you first about arranging finance before he made the bid?

No, he made the bid with the underwrite from Citi and HSBC and then came to sell the story to the banks. The first step was to get the bridge away and then he was actively selling it to the shareholders.

But you’re absolutely right about the size of the transaction – $2.65-bn at the bridge and $2.2-bn the acquisition price for the shares, does make it one of the biggest deals in South African mining finance history and certainly in the platinum sector.

So, just take us through how your involvement works in a deal like this one. Neal Froneman is an ambitious entrepreneur, he sees an opportunity in the United States, he thinks he has a good enough relationship with the banks to at least make the approach. When he first talked to you, how did he know that you were going to be loyal to him?

I think we also have to acknowledge Charl Keyter in this process. As the CFO Charl was intricately involved in this process. Usually when something goes wrong it’s generally Charl who gets the calls from the banks saying: “Hey, you said that we were going to be getting our money back. What’s happening?”. Charl and Neal work as a team and they de-risked this upfront by getting the broader underwrite from Citi and HSBC. Every step of the transaction that followed was about further de-risking the process.

Neal Froneman, chief executive officer of Sibanye Gold Ltd., speaks during a Bloomberg Television interview. Photographer: Matthew Staver/Bloomberg

By the time they had made the announcement, they had given, what you call ‘funds certain’ – a regulatory requirement for the US-listed Stillwater. They had to show the shareholders that they were good for the money. And they managed to do just that through these two initial parties who then very quickly wanted to make sure that they didn’t have to stump up US$2.65-bn themselves, and so went to the market and leveraged the existing Sibanye relationships. A great deal of the selling was actually done by the Sibanye management team to ensure that the risk was spread across the banking market. Neal didn’t have any party, who was particularly overexposed, to provide the debt and get them across the line.

When they went into the equity side of things, they obviously went for the option of an underwritten rights issue. I think that the underwrite in the rights issue gives the management team a lot of confidence that they’re going to get the money that they need. The reason for this is that having that amount of debt on your balance sheet is not something that anyone is going to be comfortable with – especially when you’re gearing up to the extent of your own market cap at that point in time.

I think that underwrite gave them a lot of confidence to progress forward. At the end of the day they’re still planning on quite aggressively paying debt down over the course of time from their own operations, but really, the first step was to make sure that the equity came in and that the company was on a firm footing.

It’s an interesting process because at some point in the chain you as bankers must be holding quite a lot of risk.

I think this was a great example of a good structure in the transaction where you had to have a lot of shareholder support before the transaction went ahead. By getting that vote of confidence we had a good sense that the shareholders were likely to follow their rights in the rights issue. From the point that the shareholders said: “Go, we’re happy with you to go and do this transaction”, the banks were in it for that full amount of US$2.7-bn.  Until the end of the day when the cheque is signed and the cash hits the bank account, the banks are in for a fair chunk.

There was a lot of risk around the equity money coming in, also the high yield bond being issued, and those proceeds coming in to repay the bridge. Given where we were at this point in time (with the mining charter not been released) there was a big risk looming from both equity and debt fronts.

A Caterpillar dump truck operates at Stillwater Mining Co.’s Stillwater Mine Complex in Nye, Montana, U.S. Photographer: Chip Chipman/Bloomberg News

Everyone was concerned that this was going to be the bombshell dropped that would send the share price through the floor, leaving them unable to raise equity numbers. I guess that’s why the underwrite to the rights issue also added a bit of value there.

You’re probably more aware of it than most people who are in London, the industry sentiment around the mining industry, particularly in South Africa hasn’t been great over the past six months. To be able to get all of this away was no mean feat.

What about the Rand and the role that it might play, given that when Sibanye went into this transaction, it was a 100% Rand-based business?

I think that’s an important aspect of the rationale for Sibanye in that they were moving away from being completely tied to the volatile Rand exchange rate movement. That’s why it’s good to have a little bit of mining presence outside of a Rand-linked economy so that you’re not completely a slave to whatever the Rand is doing at any point in time.

If you look back at the movement in the various charts from when the transaction was probably conceptualised in early 2016, considering the prices and the exchange rates for key commodities and currencies, they’re worlds apart from where we are now.

Mixed denomination rand currency banknotes are arranged for a photograph at a First National Bank (FNB) branch in Johannesburg. Photographer: Nadine Hutton/Bloomberg

At the beginning of 2016, we just had Nenegate, the Rand was through the ceiling, and the gold price in Rand terms was doing exceptionally well. Even palladium (which is generally not linked to the South African economy in the same way) was trading in the low six hundreds, late five hundreds and since reached over 850. It has almost gone up 50% in that time. It is incredibly difficult to make a long-term call, with short-term volatility and to convince shareholders that normally have that very short time horizon in their investments to buy into something where you’re actually making a call for five years plus down the line.

How do you assess it, because when you look five years plus down the line, the biggest offtake of palladium and platinum at the moment (being the autocatalyst industry) is looking in quite a lot of danger given the shift away from internal combustion engines to electric engines? How do you balance all of that?

It was a very tricky discussion. Talking about the fate of the South African platinum industry because of those concerns, is one of those things that is an ongoing discussion at all South African banks with very different views. Fundamentally I think that even if there were a very significant shift to electric vehicles in the near term, it’s going to take a very long time to replace the existing vehicle fleet. Many of the alternatives actually use platinum. Therefore, the metal mix in electric vehicles is quite different in the power drive to your internal combustion engine and that will change the mix of demand.

Platinum is the key component of many of the fuel cell vehicles, which sees the same interplay between price and demand that we saw when platinum ran. If platinum becomes particularly cheap, then it becomes far more economic to use. I think that there is a general trend globally to make cleaner technologies. The platinum group metals are an intricate part of that trend and I don’t think that’s going to change, probably, in our lifetimes. While the demand sources will vary in overall levels of demand, it does seem unlikely – we’ve  probably made that call as an institution – that we’re going to stop using platinum and palladium altogether.

Let’s go into the nuts and bolts of the deal itself. You’ve referred to the bridge facility of $2.65bn, what exactly is it?

The bridge facility is an easy way of saying we’re going to give you money now and make a plan. It was driven by the need to have the certainty of funding in the US market, but what you’re saying by putting the bridge in, is that there are other sources of money that are going to come in over the course of time.

Companies use bridge facilities when they’re typically in an M&A process – when it’s market sensitive information that you don’t want to go out to shareholders and every bank in the world. One enters into bridge facilities, when one has the confidence of the funds, but then that gives you a bit of headroom to close off the transaction and then put in place your funding to get the right capital structure once everything’s been bedded down.

So, until you have a bridge facility, you are really negotiating from a position of weakness?

Absolutely. The strongest offer you can make to a seller is to say: “Cash on the table, this is what we’re going to give you, this is the price”. As soon as you start saying: “Okay, well we have a plan to fund” or “We’re going to give you shares” it starts to weaken the strength of that offer. Therefore, if you want to maximise your chances of success, you should really go with the smallest possible set of conditions and the most cash. A bridge facility allows you to do just that.

It was oversubscribed, how does that work?

Correct. When Neal, Charl, and the team approached the banks, they got the total required funding amount ($2.65bn) and asked every bank to come to the party with a certain amount. Typically, if you’re arranging this, you invite more banks than you think you would need, just in case some of them fall out of the process. So, if banks don’t have an appetite to fund the transaction, they won’t get across the line in time. That’s when you can afford a little bit of wriggle room. What happened here was that the uptake rate was incredibly good and their appetite was much bigger ($3.7bn) than what they actually needed ($2.65bn) funding for.

Why would that be?

Banks generally like to be associated with these large headline-grabbing transactions. There was a lot of involvement in the banks from the point of extending the bridge to make sure that it got taken out and that the risk was managed.

Sibanye’s relationship network pre-announcement of the transaction was also fairly extensive. They have both an international and a local network of South African banks that have extended funds. They have formed those relationships over the course of time. It was a case of not excluding them and to ensure they remain committed. Then you have a few new entrants who, I think, see this as an incredibly aggressively growing, up-and-coming company. They want to make sure that they get in at a time where they still have the opportunity to do so and can build that relationship and cement future business.

So, we have the bridge facility, that’s been put away as you’ve explained. Many banks wanted their share, but being a bridge, it is short term. What happens next or what did happen next in this case?

The next step in this transaction was the rights issue – to bring in the equity. It turned out to be an immensely successful rights issue. I think when they announced it, there were excess applications for around five times the amount that they actually needed. What that means is, in the rights issue, you are allocated your nil-paid letters, and you can follow your rights that would raise the targeted amount (in this instance a billion USD). It also enables you to  manage the risk in the rights issue in case some people don’t take up their rights or don’t sell their allocation letters.

So, to say that if some people don’t take up their rights, we would allocate that gap to other people who are interested in buying, coupled with the fact that there was almost $5-bn appetite for those excess applications, is a very strong vote from the shareholders that they saw this as an attractive transaction.

So that’s just over a third of the bridging facility that’s been put to bed, what about the rest of it?

The next step (which they did very soon after the rights issue) was to approach the debt capital markets. You have a class of investors who are looking for yield in USD terms. Sibanye placed the corporate bond into that market for just over a $1 billion as well. That was a quick process from start to finish.

Once they got the equity in, there was a solid story to convey to the debt capital markets. If you were to purchase their bonds, they would place the five-year and eight year tranche and they would be earning this in hard yield. That was also quite heavily oversubscribed. The market is very supportive of these sorts of yield plays at the moment, particularly with the low interest rate environment in the US.

What are they going to end up paying, what interest would they pay on that bond?

I can’t recall the figures off the top of my head, but I think it was 6% for the five-year and 7% for the longer dated tranche. It was a sort of 500, 550 split between the two.

When you run your numbers over the projected revenues from Stillwater, clearly there was enough to fund that very comfortably?

Absolutely. The actual issuer of the bond in this instance was Stillwater and then guaranteed by the rest of the group. Stillwater’s cash flows are projected to be very strong, particularly with the ramp up of the Blitz Project, which is almost increasing the size of the company by 50% over the next couple of years.

So, with that coming through and their low position on the cost curve (particularly where the palladium price is now) they should be very comfortably able to service those interest payments on the bond.

Julian, this is an interesting transaction in that you have a South African business that wants to globalise. It acquires the biggest platinum/palladium, or PGM metal business in the US, makes a bid for it and actually succeeds. It’s not the kind of thing we see happening every day. Do you foresee similar moves from South African-based resources companies trying to diversify?

We have seen a bit of a push from the resources sector – it’s a theme that we’re observing across the South African economy. There are many companies that are looking to make sure that South Africa is not their only revenue stream and that they’re not completely exposed to the idiosyncratic risks in the country.

We have subsequently helped a number of companies with acquisitions – mostly in the European market and less so in the mining sector. I think that the theme around moving into Africa, for example, has been one that’s been running for a number of years now. There haven’t necessarily been valuation corrections that people were hoping for to be able to close these transactions.

Read also: Has Sibanye’s Froneman over-reached in SA deal of year? Mark Ingham thinks not

No one would say that the Stillwater transaction was a bargain basement kind of purchase. Sibanye said they were paying a very full price for an existing business, but they see value in many of the growth projects and the intelligence they get from the recycling business (which a lot of the market doesn’t attribute value to).

In many ways, Sibanye was continuing its contrarian trend in buying. This isn’t necessarily the case with other companies that are moving abroad and just buying existing solidly producing businesses to bulk up their platforms and diversify their risk.

You mentioned also that there were banks who wanted to get involved in the early stages of this mushrooming business. Is the message that Sibanye are giving to the banks and to the financiers, that Stillwater is not the ultimate destination, just a milepost in their journey?

Absolutely. I think that Neal’s almost been explicit in saying so. He said that this is part three of the four-part strategy in the PGM business and there’s still one more thing that they’re looking to do. So, the action is certainly not over yet, that’s just the PGM business, they still have a very large gold business. I think that they would look at expanding that for the right set of values. What becomes increasingly difficult for a company of Sibanye’s size now is making sure that they do things that would move their needle. For them to buy a small African start-up company producing 50,000 ounces, probably won’t really get much recognition. And so they’re carving out quite a job for themselves to do chunky transactions each time and deliver on those. It does however make for a very exciting company to watch.

Julian Grieve is a Transactor at RMB’s Investment Banking division.

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