Gold Fields offers $38.7b for Northern Star. The market isn't buying the paper.

What happened

South Africa's Gold Fields made an unsolicited proposal for Northern Star Resources, owner of Australia's biggest gold mine, the Super Pit near Kalgoorlie. It valued Northern Star at $38.7 billion, or $27.00 a share: 0.3125 new Gold Fields shares plus $7.25 in cash for each Northern Star share, a 22% premium to the last close before the approach landed on 14 September.

Northern Star's board said no, unanimously, and called it highly opportunistic. Its reasons: the price undervalues long-life assets in low-risk jurisdictions; nearly three-quarters of the consideration is Gold Fields stock, which carries more jurisdictional risk; the timing lands just ahead of the ramp-up of its expanded Fimiston mill; and the conditions attached were onerous.

The tell

Northern Star closed up 6.2% at $23.47, about 13% below the headline price. And the headline had already moved: with Gold Fields' own shares lower, the proposal was worth about $25.19 a share on Friday's close, a premium of roughly 14%. A gap like that says the market doubts the deal happens at this price, doubts the paper, or both.

The logic Gold Fields is selling

• Scale. The combined group would be the world's second-biggest gold producer after Newmont, at about 4.1 million ounces a year.
• Overlap. Gold Fields already runs four mines in WA's Goldfields (Agnew, Granny Smith, Gruyere and St Ives) and bought Gold Road last year for $3.7 billion.
• Synergies. Gold Fields puts them at $4–5 billion.
• Ownership. Northern Star holders would own 33% of the combined group, which would keep a secondary ASX listing.

The pressure on the target

Northern Star's shares were down 9.5% for the year before the approach, after production downgrades and cost creep on the $1.7 billion Fimiston mill expansion. Activist fund Elliott holds 6.2% and pushed in June for a strategic review that could lead to a sale. Northern Star has since added two Elliott-backed directors and appointed a new chief executive. Gold Fields says it has tried to engage for six months and remains open to talks.

The mid-market read

What you are paid in matters as much as what you are paid. About $19.75 of the $27 was scrip, and its value moved before the board had even replied. Take scrip and you become an investor in the buyer: its assets, its jurisdiction, its share price on completion day.

Three questions for any offer with shares in it:

1. What are the shares worth on a bad day? Value them as if someone asked you to buy them.
2. Can you sell them when you want to? Escrow, liquidity and index weightings all change the answer.
3. Who carries the risk until completion? A fixed ratio puts the buyer's share price on you. A collar or a cash alternative shares it.

What to watch

• Whether Gold Fields returns with more cash, or walks.
• Elliott's next move, and whether other suitors appear.

Also on the ledger

• Ingenia Communities. Warburg Pincus lifted its offer to $5.25 a share, about $2.14 billion and a 16.7% premium to the last close. The board has made no recommendation yet, having rejected two earlier proposals as undervaluing the company.

General information only, not financial product advice.