Mining behemoth Anglo American is not a company that too many informed investors would have slated for an opportunistic takeover. By the rules of the commodity jungle, Anglo should be the beast on the prowl. The Anglo alumni from the Main Street era would be aghast at the predicament.
While BHP’s initial tilt is a clear affront to Anglo and its own plans to unlock and build value for shareholders, the event is likely to have further significant implications in the months (perhaps years) ahead.
There is much speculation about the possible emergence of other suitors, though any potential bidders might prefer to wait out the BHP engagement before formalising any plans. Anglo’s share price certainly reflects such sentiment; it has risen well over 20% on the week. Reaching these levels will mean that BHP will have to table something more attractive. Of course, other possible bidders — Rio Tinto and Glencore being the obvious names — might not want all of Anglo. It will make things interesting if the group is spurred into a restructuring.
Anglo shareholders might now want to see action with regard to prickly matters such as diamond business De Beers
Overall, unsolicited bids have a habit of bringing out the best in the target company ... presuming, of course, they can be fended off.
Two examples might suffice. The old Nedcor’s offer for the much larger, but then distinctly complacent, Standard Bank certainly lit a fire under the latter’s leadership. Nedcor settled for smaller cheese in the form of BoE Bank; and Standard Bank, under Jacko Maree, was re-energised to great effect.
A little more recently, private education upstart Curro’s hostile advance on more conservative rival AdvTech snapped the latter into decisive expansion action, to great effect for shareholders. The divergence in the performances of Curro and AdvTech in the ensuing years is conspicuous and very telling.
How things will pan out between Anglo and BHP will be intriguing.
Anglo’s contention that BHP’s bid undervalues the business has been coupled with arguments about a “highly unattractive” structure for shareholders, as well as execution risks. That’s all good and well, but Anglo shareholders might now want to see action with regard to prickly matters such as diamond business De Beers. BHP already has Anglo shareholders mulling the merits of unbundling the highly cyclical Anglo American Platinum (Amplats).
Funny, though, that BHP seems to believe strongly that a combination of the two mining giants would harness their respective strengths into an optimal structure. In terms of investment scale, a combined entity would be valued at R3.5-trillion — before BHP’s suggested demerger of Amplats and iron ore miner Kumba.
There is even some critical gloating in BHP’s suggestion that Anglo would bring assets and long-term growth potential while it would bring its higher-margin cash-generative assets and growth projects, along with its larger free cash flows and stronger balance sheet. This tetchy transcript could rouse Anglo management into action, provided shareholders want to stay the course.
If there is upside from Anglo getting a wake-up call, there is also something quite reassuring about participating in an enlarged mining business with a powerful cash-generating portfolio of low-cost, long-life assets revolving around iron ore and metallurgical coal and new age commodities such as potash and copper.
The last-mentioned commodity is key for BHP and any other suitors in the wings. The group’s much discussed Quellaveco Copper Mine project in Peru hit full production capacity last year and is expected to kick in meaningfully in the financial year ahead. If Quellaveco delivers on its promise, this could be a decisive reason for Anglo to send away any unwanted suitors.
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