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Northern Star (ASX:NST) and Saracen (ASX:SAR) announce mega merger

M&A Letters

Both the Northern Star Resources Ltd (ASX: NST) share price and the Saracen Mineral Holdings Limited (ASX: SAR) share price are storming higher on Tuesday morning.

At the time of writing the Northern Star share price is up 5% to $14.55 and the Saracen share price is up 8% to $5.65.

Why are these gold miners charging higher?

Investors have been buying Northern Star and Saracen shares this morning after they announced an agreement to undertake a $16 billion merger-of-equals.

According to the release, this merger will create a top 10 global gold company targeting production of 2 million ounces of gold per annum exclusively in tier-1 locations.

The companies also expect the merger to result in significant synergies. A total of $1.5 billion to $2 billion in unique pre-tax synergies are forecast from the merger. This is via the consolidation of their KCGM ownership, optimisation of processing throughout the broader Kalgoorlie and Yandal regions, and other savings over a ten-year period.

As part of the agreement, Northern Star will acquire 100% of the shares in Saracen for 0.3763 Northern Star shares for each Saracen share held. Based on Monday’s Northern Star share price, this equates to $5.20 per share.

Saracen will also pay a special, fully franked dividend of A3.8¢ per share, conditional on the scheme becoming effective and banking consents.

The scheme is unanimously recommended by the board of Saracen, subject to no superior proposal emerging and the independent expert concluding that it is in the best interests of shareholders.

“An abundance of value.”

Northern Star’s Executive Chair, Bill Beament, believes the merger will create a lot of value for both sets of shareholders.

He commented: “Northern Star has only ever pursued growth when it will create value for shareholders, and this merger-of-equals will create an abundance of value for both Northern Star and Saracen shareholders.”

“This is significant value-creating M&A. Our position as joint venture partners at KCGM, the close proximity of the majority of the combined company’s assets and a host of other synergies makes this a unique opportunity exclusive to Saracen and Northern Star shareholders,” he added.

This sentiment was echoed by Saracen’s Managing Director, Raleigh Finlayson, who will lead the merged entity.

He said: “The benefits which will flow to Saracen shareholders from this merger are significant. The pre-tax synergies alone are expected to be worth in the order of A$1.5 to A$2.0 billion over the next 10 years.”

“Saracen shareholders will own 36.0% of the combined group and therefore share in the significant benefits of these synergies, which is value that would not have been available to our shareholders otherwise. It is difficult to foresee anything like that reduction in our cost base outside of this merger,” the managing director added.

Mr Finlayson notes that this is one of the most logical mergers in mining industry history.

He concluded: “This is one of the most logical and strategic M&A transactions the mining industry has seen. The savings, the synergies and the growth opportunities it will generate make the transaction extremely compelling. In short, it is a unique opportunity for Saracen shareholders unlikely to be replicated via any other avenue.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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