The shock rejection of Owen Hegerty’s outrageous golden handshake has garnered its share of headlines. While the institutional shareholders rejection of Hegerty’s payout is no doubt big news (it represents the first time shareholders have officially knocked back such a payment), in the scheme of things, it is relatively minor. That’s because the merger between Oxiana and Zinifex which Hegerty himself engineered is quickly looking like one of the worst mega-deals the mining sector has seen since BHP’s disastrous acquisition of Magma Copper.
Oxiana is primarily a copper, gold and silver miner. Growing from one mine (acquired from Rio Tinto) in Laos, Oxiana has expanded with new projects in WA and South Australia. Since the merger was announced on 3 March 2008, the copper price has held steady, at around US$3.80lb. The gold price has eased by around 2%.
By contrast, Zinifex is almost a pure zinc play (it also produces a small amount of lead). Its major assets are the Century zinc mine in Queensland and the Rosebury mine in Tasmania. Since the merger was announced, zinc prices have collapsed, dropping 29%. Since December 2006, the zinc price is off by more than 60%. (Zinifex shares, which had risen from $2.00 in 2004 to more than $20 last June, have since slumped back to $8.00.)
The merger was completed by way of scheme of arrangement. While it was a “merger of equals”, for legal purposes, Oxiana was the acquirer and Zinifex the target. Therefore, only Zinifex shareholders were able to vote on the deal (and only Zinifex shareholders received an Independent Expert’s report). Oxiana shareholders had no ability to reject the deal. According to the terms of the merger, Zinifex boss, Andrew Michelmore, would assume the reins of the new company, while Oxiana chief, Hegerty, would become a non-executive director of the renamed, OZ Minerals.
In exchange for leading the merger and stepping aside, Hegerty was set to be given more than $10 million (including a grotesque $5.4 million cash payment for options which were not yet even issued and for all intensive purposes, would have been worthless).
Sadly, things haven’t quite gone to plan. In fact, the deal has been a complete disaster.
At the time it was announced, Zinifex and Oxiana were worth a combined $12 billion. Based on Friday’s share prices, the merged entity will come in at around $6 billion market capitalization. Most of the value loss has come from the Zinifex side, so the merger has literally cost Oxiana shareholders billions. This scene is reminiscent of the ill-fated Time Warner-AOL merger (where AOL shareholders received the benefit of Time-Warner scrip in exchange for their worthless AOL shares).
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It was therefore with some surprise that Oxiana chairman, Barry Cusack, proceeded to give Hegerty (who still owns more than $70 million in Oxiana shares) one of the most gushing send-offs seen in a long time at the Oxiana EGM last Friday. When he announced that shareholders had voted against Hegerty’s payout, it seemed like the chairman was about to burst into tears.
As has been well reported, institutional shareholders voted against Hegerty’s appalling package, leading the Oxiana board to perform a humiliating back-flip and withdraw the resolution, much to their apparent chagrin. It appears the Oxiana board were only too happy to spend someone else’s money.
Rest assured, the OZ Minerals board will return to the drawing board, and come up with the richest possible package for Hegerty which doesn’t need shareholder approval. Or as Cusack noted to Oxiana shareholders, “the board will act in the best interests of the company, and consistent with that duty, will look to treat Owen fairly in the circumstances, and we will keep shareholders informed as appropriate.”
It is a sad fact that for most boards, “the best interests of the company” are very rarely the best interests of shareholders.