Letter from Centroferve Limited to Celtic Resources plc’s Shareholders
OREANDA-NEWS. October 8, 2007. Severstal Resurs, through its wholly owned subsidiary Centroferve Limited, announced an all cash offer for Celtic Resources plc of 270 pence per Celtic share, which values Celtic at approximately Ј161 million; significantly higher than the Ј115 million value of just 11 days previously, when Celtic announced it had been approached regarding a potential offer for Celtic. This letter sets out the background to the offer and why it represents excellent value for Celtic shareholders.
Excellent value
43.6% premium to volume weighted average share price for the three months to 17 September 2007
33.0% premium to price on 17 September 2007
The offer represents a substantial 43.6% premium to the volume weighted average price of a Celtic share for the three months to 17 September 2007, the day prior to Celtic’s announcement regarding a potential offer approach, a 33.0% premium to the Celtic share price on 17 September 2007, and a 41.4% premium to the volume weighted average Celtic share price for the one month to 17 September 2007.
The offer also represents a 72.0% premium to the volume weighted average price at which MG Capital, from May to August 2007, sold 149,000 Celtic shares. Peter Hannen is Celtic’s chairman and also MG Capital's chairman and largest shareholder, but according to Celtic's announcements, "was excluded from the procedures whereby this decision was made".
Barrick Gold Corporation, the world's leading gold producer by market value, has recognised the attractiveness of the offer by entering into a Letter of Intent to accept the offer in respect of its 6.6% shareholding in Celtic.
Certainty and significant cash gain from pre-approach Celtic share price
The offer represents certainty and a significant cash gain relative to Celtic’s recent share price, whereas in the three year period prior to the offer period (i.e. 17 September 2007), the Celtic Board's confused strategy delivered to you a total return of -48% - a near halving of the share price.
In the same period, publicly traded gold companies operating in Russia and the former CIS region delivered a total return of +43% to their shareholders. Celtic’s confused strategy included the reversal on Eureka Mining, first spinning it off, then buying it back, then selling some of its assets. It also resulted in the forced sale of the 50% stake in the valuable Nezhdaninskoye gold mine at a price "not fully realizing the apparent value of the 50% stake in the mine" (RBC Capital Markets, 26 June 2006).
The offer and our stakebuilding is supporting an inflated Celtic share price
During the 8 trading days from 5 September 2007, when we first approached Celtic with the terms of a possible cash offer, and 17 September 2007, the day before Celtic's announcement regarding a preliminary approach that may or may not lead to an offer, Celtic's share price increased from 188.5 pence to 203 pence. Following Celtic's announcement on 18 September, the share price increased from 203 pence to 222.5 pence and then to 231 pence on 27 September 2007, the day prior to the announcement of Severstal Resurs' offer.
The Severstal Group already owns 29.7% of Celtic. This significant strategic stake can be used to block any other party from acquiring full control of Celtic and could potentially dissuade third parties from making a competing offer. In the absence of our offer, or if our offer is not accepted, there is a likelihood that the share price of Celtic will fall significantly.
Reasons for the unilateral offer
On 5 September 2007 Severstal Resurs approached both the Chief Executive Officer and Chairman of Celtic with the terms of a possible cash offer. This proposal was conditional upon the provision of certain due diligence to the reasonable satisfaction of Severstal Resurs and the recommendation of the Celtic board of directors. Severstal Resurs reserved the right to waive, in whole or in part, any of these pre-conditions at its discretion.
On 18 September the Celtic board of directors rejected Severstal Resurs' proposal and declined to provide the limited due diligence requested.
On 27 September Severstal Resurs again approached Celtic's Chief Executive Officer with a proposed cash offer without due diligence conditions and with a view towards securing a recommendation from the board of directors of Celtic. Celtic decided not to afford its shareholders the opportunity to consider this offer, and Severstal Resurs' approach was again rejected. Severstal Resurs therefore felt there to be no grounds for reaching an agreed outcome.
Following Celtic's refusal to engage in meaningful dialogue on a potential offer, after the acquisition of an initial 22% interest in Celtic Severstal Resurs received unsolicited approaches from several shareholders requesting that it extend the opportunity to other shareholders to exit at similar values. This included East Guardian Opportunity Fund, from which Severstal Resurs purchased a further 4.6% of Celtic on 20 September 2007.
On 28 September 2007, Severstal Resurs acquired 3.1% of Celtic from DWS Investments and in the open market, taking its ownership stake in Celtic to 29.7%. The total percentage of Celtic shares in respect of which support for the offer has already been expressed is 36.3% including the letter of intent in support of the offer from Barrick Gold.
In light of Severstal Resurs' desire to increase its ownership in Celtic beyond the current level, and approaches from Celtic shareholders to Severstal Resurs to extend its offer to all shareholders, Severstal Resurs has therefore decided to pursue the transaction on a unilateral basis so that all Celtic shareholders have the opportunity to benefit from this significant cash premium.
In the event Severstal Resurs does not reach the 80% acceptance level required for compulsory acquisition, the Severstal Group, as the largest single shareholder, intends to run Celtic as a subsidiary in accordance with Severstal’s own strategy, subject to regulatory requirements and minority shareholder rights.
Support the Severstal Resurs offer
You will no doubt have read Celtic's announcement issued in the early morning hours of 28 September regarding a bid approach by an unnamed third party, as well as their subsequent announcement rejecting our offer. However, to date, no other offer has emerged, and Celtic has admitted that "no details of the bid are known" with respect to this supposed third party approach.
You should be disappointed by your board's lack of consideration of our offer (your board issued its rejection statement a mere 33 minutes after our offer announcement) and its failure to embrace a value-creating transaction by rejecting an offer by Severstal Resurs that is public, is fully financed, is at a substantial premium, and is in cash. The Celtic directors are unnecessarily placing your money at risk by not recommending that you accept Severstal Resurs' attractive offer. Your board has demonstrated that it values its continued independence above shareholder value.
Attached to this letter is the full text announcement of the firm intention to make an offer under Rule 2.5 of the Irish Takeover Panel Act 1997, Takeover Rules 2001 to 2006 (the "Irish Takeover Rules") setting out the detailed terms of the cash offer. Additionally, in the very near future, and in any event no later than 26 October 2007, you will receive the offer document in relation to our offer for Celtic and instructions on how to accept the cash offer. I strongly encourage you to carefully read both documents and ACCEPT the Severstal Resurs offer.
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