🔒 BHP’s complex bid for Anglo calls for extra premium: Chris Hughes

In the high-stakes world of corporate takeovers, BHP Group Ltd. is facing a formidable challenge in its pursuit of Anglo American Plc. Proposing a complex two-stage deal, BHP aims to seize control of Anglo’s prized copper assets while avoiding excess baggage. However, Anglo shareholders remain sceptical, demanding more than just a modest premium. As the negotiations intensify, BHP must navigate through intricate structures and mounting pressures to secure its coveted prize.

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By Chris Hughes

You can overcome most objections to a deal just by offering to pay more. BHP Group Ltd.’s attempted takeover of rival miner Anglo American Plc could push the idea to the limit. ___STEADY_PAYWALL___

To recap, BHP has proposed a cheap and unusual two-stage deal that creates a lot of uncertainty for Anglo shareholders. This was easy for its target to reject. BHP must now address the two key snags: value and structure.

The Australian suitor is trying to secure Anglo’s copper assets and avoid buying too much of the rest. Hence its £31 billion ($39 billion) takeover approach was predicated on Anglo first distributing to shareholders the stakes it owns in two Johannesburg-listed miners, Anglo American Platinum Ltd. and Kumba Iron Ore Ltd. After that, Anglo investors would swap their holdings in the shrunken company for BHP shares at a premium. 

The Platinum and Kumba assets are worth about £8 per Anglo share, while the BHP offer for the rest was worth £17 based on the suitor’s share price before its interest emerged. That, BHP said, implied a total value for the proposal of around £25 a share.

All good for BHP, which would cherry pick the best bits for an undemanding price. JPMorgan Chase & Co. research puts the value of Anglo  excluding the listed stakes at nearly £18 a share and more than £21 on more bullish assumptions.

But for Anglo shareholders, the pitch was worth just 14% more than the stock price before Bloomberg News reported BHP’s interest. Successful takeover premiums are usually at least 30% for prime assets. Moreover, many months would pass before the various transactions are completed. The final value received by Anglo shareholders could be quite different. One clear risk is that Anglo’s international investors sell the Platinum and Kumba shares upon receipt, forcing their price down.

Clearly, BHP will have to raise the price of its offer to get the friendly transaction it needs, given the firm’s unpopularity in South Africa. The question is whether it also drops the condition that Anglo do the splits.

Imagine if BHP made a simple, no-strings proposal to buy all of Anglo at a one-third premium, say around £29 a share. Anglo would be under huge pressure to enter talks. Many of its investors may well prefer to accept a bid around that level rather than stick with Anglo’s current management.

BHP would, of course, be buying a bigger bundle of assets than it wanted. The resulting complexity could be a turnoff for its own investors. But a cleaner proposal could give BHP a higher chance of getting hold of the real prize: the copper business.

Taking on all of Anglo wouldn’t be the best deal for BHP, but it wouldn’t necessarily be a bad transaction at a sensible price. Several analysts have sum-of-the-parts valuations at or above this level. 

Then there are the synergies. Jefferies research reckons they’re worth around 250 pence per Anglo share. And BHP could take time to dispose of the assets it didn’t want in an orderly way, avoiding fire-sale prices.

Alternatively, BHP could stand its ground on Anglo shrinking before a takeover. But if it wants a fiddly structure, it will have to be even more generous on price. To see why, imagine if a counterbidder made an offer for all of Anglo. Side by side, a BHP bid conditional on a drawn-out separation process would be less appealing even if it could be presented as adding up to the same price.

Suppose BHP dangled at least £22 a share for Anglo excluding Anglo Platinum and Kumba. Adding back the stakes, it could say Anglo shareholders were getting more than the symbolic £30 a share. For BHP, such a transaction would give it the portfolio it wants. But it would have less margin for error in extracting synergies.

BHP wants Anglo investors to think a premium should be paid only on what it’s buying and not the whole company. But what matters here is giving Anglo shareholders a decent — and reliable — price relative to their shares’ pre-bid level.

So long as there is no gate crasher, BHP doesn’t need to concede too much ground in a hurry. But if it’s not walking away, it should try upping the pressure by adding a modest financial sweetener. Later would come the hard decision: Bid for the whole, or raise the price even higher.

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