Gold Offer Loses Shine

South African gold miner Harmony Gold Mining Company (NYSE: HMY  ) officially made its much-anticipated "tender offer, Part I" yesterday, and received a remarkably lukewarm response from shareholders of rival Gold Fields Limited (NYSE: GFI  ) .

In its effort to become the world's biggest gold miner, Harmony already had the support of Russia's Norilsk Nickel in the bag. These friends from the north were committed to selling Harmony their 20% stake in Gold Fields. Harmony's next step was to offer to buy 34.9% of Gold Fields' shares for 1.275 shares in Harmony apiece. At the time that offer was originally made, it represented a premium to Gold Fields' share price. By today, though, investor distaste with the transaction and the international legal brouhaha it sparked had eliminated that premium -- actually transforming Harmony's offer into a discount to Gold Fields' own share price. At the offered exchange rate, Harmony was essentially offering to buy shares worth $14.27 for $13.53 apiece.

Not a bad deal, if you can get it -- but the trick is convincing people to trade in their shares for less than the market is willing to pay for them. Somehow, though, Harmony found some willing sellers and, yesterday, a full 10.8% of Gold Fields' shareholders said "OK."

Still, this is a far cry from the victory that Harmony had sought. It's nothing like, for example, the resounding 60% endorsement by PeopleSoft (Nasdaq: PSFT  ) shareholders for Oracle's (Nasdaq: ORCL  ) tender offer. In fact, it much more resembles Harmony's "Mayday, Bail Out!" scenario, described last month when the company's CEO said that if only 10% of Gold Fields' shareholders tendered their shares, Harmony would back down and not even accept Norilsk's stake.

To make this strange tale even stranger, Harmony now says the 10.8% acceptance figure "provides strong impetus" for the company to proceed with making "Part II" of its tender offer, this time for all remaining Gold Fields shares. Industry analysts believe that for Harmony to succeed with its second attempt, it will have to sweeten its offer price considerably. If it fails to do so, it seems unlikely that its second attempt will meet with any greater success than its first.

That would hurt Harmony's stock price, but probably help both Gold Fields' (which has dropped 4.5% in value since the takeover saga began), and that of Gold Fields' own preferred merger partner, Iamgold (AMEX: IAG  ) . On the other hand, any significantly higher offer by Harmony should hurt Iamgold's stock price, given Harmony's stated intention to reverse the Iamgold-Gold Fields merger if it gains control of Gold Fields.

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Fool contributorRich Smith has no interest in any company mentioned in this article.


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