Anglo: no to better offer
• Heavy going for BHP’s efforts to get complex merger deal approved
Anglo American has rebuffed a second, higher offer from Melbourne-based mining giant BHP, raising questions about whether the Australian group can make the complex £34bn (R784bn) deal fly without Anglo’s cooperation — even if it pays more.
BHP, whose first proposal for an all-share merger was rejected by Anglo’s board in April, said on Monday it had raised its offer by 15%, increasing Anglo shareholders’ share in the merged group from 14.8% to 16.6%. But it left the structure of the deal unchanged as it continued to insist Anglo unbundle its key SA subsidiaries Anglo American Platinum (Amplats) and Kumba Iron Ore to its shareholders before the merger itself could be consummated.
Lawyers say that could mean a lengthy process of gaining approval from SA’s competition authorities, which would likely not have any issue with the competition aspects of a merger but would closely scrutinise the public interest aspects, as the law requires them to do, and demand a range of public interest conditions for it to be approved.
SA’s elections could prolong the process given the central role the trade, industry & competition minister plays in merger control, and the uncertainty about whether Ebrahim Patel will remain in that role in the new administration.
BHP, which on Monday set out clearly why it believes the deal would benefit Anglo shareholders as well as those of Kumba and Amplats, has undertaken to pay all the costs associated with the unbundling. And it said it would work “closely and constructively” with competition regulators to gain the necessary approvals and was confident it could obtain these.
However, Anglo repeated on Monday that the structure of the deal was “highly unattractive” for its shareholders, who would bear all the risk and inherent uncertainty and significant execution risks involved.
The demergers of Kumba and Amplats would require additional approval related specifically to these two companies, which could be affected by any conditions attached to the approvals, Anglo said in a statement. Its board also flagged the risk of distributing a cumulative total of $15bn worth of Amplats and Kumba stock to shareholders — equivalent to more than a third of the value of BHP’s offer.
“This creates significant uncertainty as to the delivered value part of the proposal.”
Anglo chair Stuart Chambers said BHP’s new proposal again undervalued Anglo. One London analyst described it as a “doomed structure”.
BHP, which under London takeover rules has until May 22 to submit a formal bid, said its new offer was worth £27.43 to Anglo shareholders, including the value of the shares they would receive in Kumba and Amplats. At this level the offer is at an implied premium of 30% for the whole of Anglo.
The new merger ratio proposed would give Anglo’s shareholders 16.6% of the merged group, up from 14.8% in BHP’s first proposal, and two seats on the board.
BHP said on Monday it was disappointed that Anglo had chosen not to engage with it on the proposal, which would be a win-win for both companies’ shareholders.
CEO Mike Henry reportedly jetted into SA last week to try to persuade stakeholders of the merits of the deal, which has gone down badly with government leaders such as minerals & energy minister
Gwede Mantashe as well as with SA trade unions.
Henry said BHP and Anglo were a strategic fit and the combination was a unique opportunity to unlock synergies.
“The combined business would have a leading portfolio of high-quality assets in copper, potash, iron ore and metallurgical coal, and BHP would bring its track record of operational excellence to maximise returns from these high-quality assets.” He also sought to reassure BHP’s shareholders that it would not overpay, emphasising the group’s “capital allocation framework” and discipline.
The Australian group said its proposal would provide Anglo shareholders with direct access to Kumba and Amplats, while SA would benefit from having the two companies as “major standalone SA mining companies and they would be better placed to reinvest in SA”.
The unanimous second rebuff from Anglo’s board comes after some of the London-listed
group’s largest shareholders indicated they might be willing to consider a higher offer than the one BHP initially proposed in mid-April. Several analysts estimate Anglo’s sum of the parts value at over £30bn.
The FT reported last week that shareholders holding a combined 15% of Anglo had said they were not opposed in principle as long as BHP sweetened its offer.
The Public Investment Corporation’s (PIC) chair, David Masondo, told Business Day the PIC would assess any offers that were presented to ensure value creation for its clients while taking into account the socioeconomic effect.
BHP said on Monday it still had the option of doing the deal as a takeover rather than a merger, though analysts believe a hostile takeover could be a significant challenge given the complexities of gaining regulatory and shareholder approvals.