Anglo bidding war likely
• BHP makes lowball offer of $39bn
Australian mining giant BHP’s proposed multibillion-pound takeover of Anglo American, in what would be the mining industry’s biggest merger in over a decade, is likely to spark a bidding war, particularly for Anglo’s copper assets, analysts say.
BHP, the biggest constituent of the JSE, on Thursday launched an audacious $39bn bid at a time when Anglo has launched a massive costcutting exercise in response to a plunge in platinum and diamond prices.
A tie-up between BHP and Anglo would be the industry’s most consequential merger since the $90bn marriage of Xstrata and Glencore in 2013.
Asief Mohamed, chief investment officer at Aeon Investment Management, said the proposed merger would create the world’s largest copper producer, potentially granting the combined entity significant market influence.
“BHP finds Anglo American appealing due to its copper assets and the strong upside potential for copper prices driven by constrained supply for years to come.
“Initial indications suggest that BHP may need to offer a considerably higher price to win shareholder approval,” Mohamed said.
“This is because Anglo American’s share price likely undervalues its assets. Additionally, competition is likely to emerge, with Glencore and Rio Tinto potentially submitting bids.”
Anglo has a diversified portfolio of minerals worldwide. It is the majority owner of Kumba Iron Ore, Anglo American Platinum (Amplats) and De Beers, which together contribute hugely to SA’s corporate tax base and mining royalties.
The proposal is conditional on the pro rata distribution by Anglo of its entire interests in Amplats and Kumba to its shareholders before the completion.
Mohamed said the decision to exclude Amplats and Kumba suggested a lack of long-term confidence in these sectors.
“The growing demand for electric vehicles, logistical challenges with Transnet Freight Rail for iron ore transport, and the declining outlook for natural diamonds, facing competition from synthetic alternatives, may be key concerns for BHP.”
Shares in Anglo American jumped almost 19% on Thursday after BHP Group confirmed the offer. which values its rival at £31.1bn. BHP’s proposal is an allshare offer.
The proposal is non-binding and subject to customary conditions, including completion of due diligence to the satisfaction of BHP. Anglo has been offered reciprocal due diligence on BHP.
According to BHP, the combination would bring together the strengths of BHP and Anglo in an optimal structure.
Anglo would bring its assets and long-term growth potential, while BHP would bring its higher-margin cash generative assets and growth projects, along with its larger free cash flows and stronger balance sheet.
The combined entity would have a leading portfolio of large,
low-cost, long-life tier-1 assets focused on iron ore and metallurgical coal and future-facing commodities, including potash and copper.
These would be expected to generate significant cash flows and the combined entity would have the financial capacity to support value adding growth projects at the optimal time.
“The combined entity would retain BHP’s global listings on the ASX, LSE, JSE and NYSE and Anglo American shareholders would be able to benefit from BHP’s monthly share trading liquidity of approximately $10bn,” it said.
The proposal would provide Anglo shareholders with the benefits of directly holding their interests in Amplats, the world’s leading platinum group metal miner, and Kumba, including enabling direct access to the future value generation and dividends of Amplats and Kumba.
The benefits to BHP shareholders would include increasing the group’s exposure to future-facing commodities through Anglo’s world-class copper assets.
It also complements BHP’s iron ore and metallurgical coal portfolios with Anglo’s highquality iron ore operations in Brazil and metallurgical coal assets in Queensland, Australia.
BHP said the announcement did not amount to a firm intention to make an offer and there can be no certainty that an offer will be made.
Head of equity research at FNB Wealth and Investments Chantal Marx said BHP proposed that Anglo shareholders receive 0.797 BHP shares for each ordinary share in Anglo and that Amplats and Kumba be spun out to Anglo shareholders.
“In rand terms, this equates to a rump value of R433.27 per share, or R579.5bn (the rump being ex-Kumba and Amplats).
Anglo’s stake in Kumba is worth about R98.3bn and the stake in Amplats about R126.2bn. This places the combined value [of the offer] at R804bn, or R601 per share,” Marx said.
“This is about a 17% premium to Wednesday’s closing price and placed the company on a 12month forward price-earnings of about 14.2 times. The rump is valued at 20 times, with Amplats and Kumba Iron Ore trading at lower valuation multiples. This valuation could easily be justified by its quality unlisted assets.
SPINOUT
“Therefore we don’t think this valuation is particularly high, which could invite other bidders to join the fray — particularly if the expectation is already there that it would mean a spinout of Amplats and Kumba.
“There was previous speculation that Glencore could be interested, and Rio Tinto has also been named as a possible suitor. There may also be a scenario where BHP ups its offer given the consensus response to its first offer — being that it is fair at best and opportunistic at worst.”
Glencore said it would not comment on BHP and Anglo’s possible tie-up.
Rowan Williams from Nitrogen Fund Managers said there is a market view that the offer is too low and is opportunistic, given that the Anglo share price has been under pressure until recently after revised mediumterm production targets were released in December.
“The share price weakness did result in speculation of a possible bid given Anglo’s attractive asset base, particularly its copper mines. Having said that, the share has been much stronger recently as it appears that the market has been pricing in the possibility of an offer,” Williams said.
“On the face of it the valuation for the rump assets is reasonable based on historical valuations. However, these are unique assets so may interest other bidders, such as Glencore, which has significant copper interests already. The bid also puts Anglo in play and, so based on the price action [on Thursday], market participants are pricing in a fairly high probability of an improved offer, either from BHP or an alternative proposal.”
Anglo’s share price is up 37% over the past three months, staging a recovery after it plunged in December, when it announced a capital expenditure cut of $1.8bn between now and 2026 to soften the blow of weaker commodity prices.
Like most miners, it is at the mercy of unpredictable commodity markets, a problem that has been compounded by a deterioration in SA’s rail network.
Amplats in February initiated a section 189A process, which is likely to result in the retrenchment of 3,700 employees. That announcement was followed by Kumba, which said that 490 workers might lose their jobs.
ANGLO’S SHARE PRICE IS UP 37% OVER THE PAST THREE MONTHS, STAGING A RECOVERY AFTER IT PLUNGED IN DECEMBER
THERE IS A VIEW THAT THE OFFER IS TOO LOW AND IS OPPORTUNISTIC, GIVEN THE SHARE PRICE HAS BEEN UNDER PRESSURE