BHP will have to lift its Anglo offer

• Mining analyst says Australian company risks overpaying

Australia’s BHP will have to sweeten its offer if it wants to merge with Anglo American, after Anglo’s share price jumped sharply on news of the bid — raising the question of how high BHP would go to clinch a deal and whether it risks overpaying.

And while the “Big Australian”, whose proposed megamerger would create the world’s largest copper producer, could simply decline to submit a formal offer by the May 22 deadline, analysts say it could look frivolous in the eyes of investors if it did. It could also face competing bids from rivals such as Rio Tinto or Glencore now that Anglo is in play.

Anglo’s board on Friday unanimously rejected BHP’s merger proposal, saying the structure was “highly unattractive” and Anglo would deliver significant value for its shareholders on its own.

The Anglo share price has gained more than 20% since reports of the proposal began to leak out in the middle of last week, taking it to £25.70 on the London Stock Exchange and R620 on the JSE on Friday. At this level it is above the £25.08 BHP said its offer was worth on April 23, the last trading day before media speculation. That includes the value of its controlling stakes in Anglo Platinum (Amplats) and Kumba Iron Ore, which must be unbundled as a condition of the BHP deal.

The share price climb suggests BHP would have to offer a lot more, especially given the “substantial uncertainty and execution risk” flagged by the Anglo board, which said the risk would be borne almost entirely by Anglo and its shareholders and other stakeholders.

‘UNBELIEVABLY HIGH’

Many analysts have a target price on Anglo of about £25. And though the share, which peaked at more than £40 at the height of the commodities boom two years ago, could be worth much more, analysts are divided.

Mining analyst Peter Major said Anglo was trading “unbelievably high”. After spending all year at about R500 on the JSE, it was now 25% higher at R640 — and at this level BHP would be overpaying. “Most of these guys overpay,” he said.

Major believes BHP, whose bid is widely regarded as cheeky, will ultimately go away. But it can’t go away too willingly, so will have to submit a firm offer — “otherwise the guys will say it was never serious”.

BHP’s share price fell last week on news of the merger proposal.

By contrast, Australian fund manager Ben Cleary, of the Tribeca Natural Resources Fund, told the Australian Financial Review that BHP could still pay £30 and get a good deal.

“It’s very on-strategy for BHP — they’ve been telling us for years how much they love copper, and it hasn’t been a big part of the portfolio and this gets them there and they get a whole load of market synergies,” Cleary said. “It’s well timed because it’s really only Rio Tinto and Saudi Arabia that are able to compete on the offer.”

ANTITRUST RISK

BHP’s proposal came under fire from mineral resources & energy minister Gwede Mantashe, who told Business Times at the weekend that BHP — which was the product of a merger between Australia’s BHP and SA-owned Billiton two decades ago — had never done anything for SA. If he could have stopped it he would have, Mantashe said.

A deal would face scrutiny by regulators across the jurisdictions in which the two groups operate. An analyst said one of investors’ concerns was antitrust risk. The merged group

would produce about 10% of the world’s copper, which is considered a critical mineral for the “green transition”, and would be bound to face scrutiny by competition authorities.

Another concern is that Amplats and Kumba would face “flowback” risk if they were unbundled from Anglo, because some shareholders would be forced sellers. Some in the market have expressed concern that without a global parent the two companies would lose some of their access to technology and markets.

Anglo chair Stuart Chambers said in a statement on Friday that the BHP proposal was opportunistic and failed to value Anglo’s prospects.

“Anglo American is well positioned to create significant value from its portfolio of highquality assets that are well aligned with the energy transition and other major demand trends,” Chambers said.

DE BEERS

“With copper representing 30% of total production, and with the benefit of well-sequenced and value-accretive growth options in copper and other structurally attractive products, the board believes that Anglo American’s shareholders stand to benefit from what we expect to be significant value appreciation as the full value of those trends materialises,” he said.

Anglo’s profits fell 31% for the year to December as the markets for platinum group metals and diamonds were hammered by the downturn, and SA’s logistics issues hampered iron ore sales.

But CEO Duncan Wanblad has undertaken an asset review to simplify and improve the quality of the group’s portfolio, promising a “value over volume mindset” and saying nothing is off the table.

The Wall Street Journal reported last week the group might be looking to put 85%owned diamond producer De Beers up for sale.

BHP also said it would review Anglo’s stake in De Beers if the merger went ahead.