Dacha Strategic Metals (CVE:DSM)(OTCQX:DCHAF), the rare earths-focused physical strategic minerals investor, is set to buy small-cap, resource-focused merchant bank Aberdeen International (TSE:AAB) in all-share deal, with some investors citing the merger as fair from both parties' point of view.
Under the terms of the definitive agreement announced late Wednesday, shareholders of Aberdeen will get 0.8 of a Dacha common share for each share of Aberdeen held. Based on the 20-day volume weighted trading price of both company's stocks ending Tuesday, the deal represents a near 8 per cent premium to Aberdeen.
Aberdeen will become a wholly owned subsidiary of Dacha, with boards from both parties already signing off on the transaction.
Once the deal is done, existing Dacha shareholders will own around 52 per cent of the combined company, while Aberdeen stockholders will hold 48 per cent.
The companies said the deal effectively doubles the total available capital for the new entity, as a way to better exploit market opportunites in junior equities and strategic rare earths.
It will also offer an "improved investment portfolio", with exposure to undervalued equities as well as critical metals, they said.
GeckoResearch, comprised of a small number of Swedish private investors who are shareholders of Dacha, said the deal seems fair for both companies on a strict economic basis.
"At first sight, we thought that this looked to be a great opportunity for Aberdeen since we know that they have wanted to grow the company in size for a long time. This merger gives them that.
"After listening to the conference call a few hours ago, and also always keeping in close contact with Dacha's CEO, we suspect that this deal might be a necessity for Dacha at this point. We know for a fact that the company has tried to sell their inventory for a lengthy period of time without any success."
The investors went on to say that Dacha's failure to sell inventory is most likely due to the "difficult world economic conditions, plus the smuggling of heavy rare earths out of China."
"With Dacha facing the risk of not selling any inventory for an even longer period going forward, this deal will at least give shareholders something through Aberdeen's portfolio."
Once the deal is complete, it is expected that the executive management of the combined company will consist of Dacha's chief executive Scott Moore as CEO, and the board will consist of four nominees from Dacha and four of Aberdeen.
"The transaction will provide Dacha shareholders with exposure to a larger, more diversified and liquid investment company," said Dacha's Moore.
"Aberdeen has an exciting portfolio of equities that are largely undervalued in the current market environment. Thus, a potential market turnaround could result in substantial value creation for shareholders.
"Furthermore, the increased liquidity and diversity allows us to better manage our strategic metal inventory and opportunistically make acquisitions or divestitures of material over time."
Aberdeen is a publicly traded global investment and merchant banking company focused on small cap companies in the resource sector.
The company looks to acquire significant equity in pre-IPO and/or early stage public resource companies, with undeveloped or undervalued "high-quality resources".
The deal remains subject to approval by two thirds of Aberdeen shareholders at a special meeting, as well as approval from a majority of Dacha investors, and regulatory approvals.
Directors and officers of Aberdeen, representing about 14 per cent of the company, have agreed to support the deal, while around 4 per cent of Dacha shareholders have agreed to do the same.
"We bought [Dacha Strategic Metals] to get the best exposure to Heavy Rare Earth's at the lowest risk and with this merger that exposure is fading away," said Gecko Research in its note.
"To us it is very clear that this will be the end of Dacha as a HREE play and we will therefore look to exit our holding over time."
The Swedish investors, who share investment ideas through their website and newsletters, added that they are in no hurry to exit Dacha, as through Aberdeen, they get exposure to Sulliden (TSE:SUE) - a "very strong takeover target, which might happen sooner rather than later." Sulliden is expected to release a feasibility study on their flagship property this fall.