The 11% Chinese owner of travel agent Thomas Cook (TCG) has entered into a bidding war for emeralds and rubies miner Gemfields (GEM:AIM). Fosun has proposed to pay 40.85p cash per share, approximately 10% higher than Pallinghurst Resources’ all-share offer which is currently equal to 37.1p.

Gemfields’ share price jumps 12.7% to 40p on the news, albeit still some 40% below the levels at which it traded two years ago.

Stockbroker Numis last month said fair value for Gemfields would be 94p per share, implying that even Fosun’s higher proposal grossly undervalues the business.

Pallinghurst’s approach on 19 May was seen as a sneaky move, pouncing on a business during a momentarily bout of weakness. It is offering 1.91 Pallinghurst shares for each Gemfield share.

High Quality Rough Emerald

WHAT WOULD HAPPEN TO GEMFIELDS’ AIM LISTING?

Pallinghurst’s shares are listed in Johannesburg and Bermuda. It wants to buy Gemfields, delist it from AIM and make it a subsidiary business of the parent group.

One proposal is to switch its Bermuda listing to London’s Main Market, so that UK investors will have ongoing exposure to Gemfields as a business - albeit as part of the broader Pallinghurst group which also includes manganese and platinum interests.

Fosun is offering straight cash, so Gemfields would also delist from AIM if it wins the fight to own the miner.

WHY HAS GEMFIELDS’ SHARE PRICE BEEN WEAK?

Gemfields’ share price had been hit by India’s demonetisation programme which disrupted the emerald market. Its emerald and beryl production was also impacted by bad weather and lower than normal grades in the first quarter of 2017.

Gemfields  GEM    Share Price   Shares Magazine

Without a competing bid, it looked like Pallinghurst would be successful in its takeover as it had already exceeded the technical requirements to proceed with delisting the business from AIM.

Pallinghurst needs approval from investors owning at least 75% of the shares. It already owns 47.09% of the business.

As of 19 May, Pallinghurst had 75.3% backing between its shareholding and irrevocable undertakings from other investors. Those irrevocables are now up in the air, in light of Fosun’s approach.

WHY IS FOSUN INTERESTED IN GEMFIELDS?

Fosun is a conglomerate with interests in various consumer-led companies such as nursery brand Silver Cross. In May, it invested $887m in Russian gold Polyus Gold, a business which is soon to re-join the London Stock Exchange, having previously delisted nearly two years ago.

The 40.85p per share proposal from Fosun may not be good enough to convince Pallinghurst to sell its stake in Gemfields, in our opinion, even though it is in hard cash.

‘Fosun has met with the Gemfields management team and has been extremely impressed with their experience and vision for the company,’ says a statement from the Chinese group.

‘The improvements that the incumbent management team have been able to achieve since taking control of the business have been consistently demonstrated over a number of years.

‘Fosun is confident that it can integrate them into its broader global team to position Gemfields to have the scale to fully exploit the consumer growth and luxury good trend both in China and globally that both parties expect to continue.’

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Issue Date: 14 Jun 2017