Today we witnessed some great Corp Dev optioning by Fortescue (ASX:FMG).

Let me explain. Typically, an acquirer’s stock takes a hit when it announces it has launched a control change bid for a target. Conversely, the target usually trades to the bid.

In this context, the price action following Fortescue’s virtual bid for junior iron ore explorer Red Hawk this morning, is notable.

Offer pricing via a conditional off-market takeover was a buck and five, with an escalator to $1.20 if Fortescue gets to a 75% relevant interest by 4-Feb, noting the two largest shareholders together hold 81.91%.

Red Hawk has already traded up to a couple of cents below the conditional price of $1.20, whereas Fortescue stock is up 1%, not down.

While it might change, there appear to be a few obvious items impacting the calculus:

Timing is on Fortescue's side because China peaked ages ago (and recent stimulus has not moved any needle forward) and there’s now more price pressure on iron ore under Trump2.0, so in this context the deal’s great corporate development for Fortescue as one of only a few giants that can afford to buy this dip for the benefit of its existing bulks business. For small independents, it's a case of big hat, no cattle.
While the margin-unlock across millions of tonnes and not too shabby grade (relatively speaking) might be worth hundreds of millions to an existing integrated Pilbara operator, there don’t seem to be many others lining up for the target (according to the target's announcements). Probably why the price isn’t what you’d call a knock-out bid, right? The acquirer’s thought process might have been ‘come in spinner' 🤣 and given Fortescue's size, undoubted funding, and no expected dilution from the cash deal for a minnow, the margin unlock + zero equity dilution are positives for share price, thus flat to slightly up by a hair or two.
But what I liked most about Fortescue's play is that it's a riskless vapourware bid and relatively cheap option over proximate tonnage. The pre-bid stake is virtual, i.e., made up of bid-specific options (remembering options are expiring rights, not obligations) over 19.99% of the register across the two largest shareholders. Also, Fortescue does not need 100% control of the target, hence the 50.1% tried and tested minimum condition play. They’ve probs sprayed some tiny fees around, and overall, it's a low-cost play regardless of whether they get to 90%. Nicely done by the bidder.

If successful, the takeover would mostly benefit Fortescue and the target company ZEPO holders (staff holding options that immediately vest on a change in control, thanks for coming), and in turn, on-market sellers and accepting securities holders who originally bought/granted at lower prices, but for everyone else it will be a mixed bag.

It’s often difficult, but nonetheless incumbent on a target Board to ensure that the deal is in the best interests of all shareholders, not just certain groups or classes.

Let’s see if anyone has the profile to pony up over the top. It’s doubtful, and but judging by the circumstances, the lock-up mechanisms and the differential price action thus far, the market seems to be saying ‘not’.

But this is billionaire mining, where anything can happen and often does.

Let's see what happens here, and who else might be trying to row a leaky boat to China.

See you in the market.

Mike

M&A 101—The almost costless option Bid for an option