BHP Group Ltd.’s ambitious £31.1 billion bid for Anglo American Plc heralds a seismic shift in natural resource deal-making, escalating from Glencore Plc’s prior moves. With a focus on securing a dominant position in the copper market amidst a burgeoning demand for the metal, BHP’s offer stands as a strategic coup. However, Anglo, trading at a discount to its intrinsic value, possesses ample leverage to negotiate for a more substantial premium, amidst potential antitrust hurdles.
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By Chris Hughes
Glencore Plc started it, and now BHP Group Ltd. is taking deal-making in natural resources up a gear. The Australian miner’s £31.1 billion ($38.9 billion) approach for Anglo American Plc has something going for it. But it’s no knockout — and Anglo is well placed to push for more. ___STEADY_PAYWALL___
The attraction of the tie-up is the commanding position the enlarged BHP would have in copper. An electrifying world has become increasingly reliant on the metal. BHP is evidently keen to ensure it has a leading position in a market that’s likely to become more concentrated. A combination with Anglo would give it an estimated 10% global share.
And Anglo is an ideal acquisition target. A transaction wouldn’t be overwhelming for a bidder more than four times the size of its target prior to Bloomberg News revealing BHP’s interest on Wednesday. Crucially, BHP doesn’t want to keep Anglo’s large stakes two other listed miners, Anglo American Platinum Ltd. and Kumba Iron Ore Ltd.; instead, it wants Anglo to hand those to its shareholders as part of any deal.
Moreover, Anglo has been trading at a discount to its break-up value as calculated by some analysts. That automatically helps justify some of the takeover premium any new owner would have to pay. There would also be substantial cost savings. BHP hasn’t set out any synergy estimates and hasn’t yet been able to conduct due diligence to arrive at them. But extracting a mid-single digit percentage of Anglo’s operating costs would seem to be a reasonable goal. Analysts at Jefferies Financial Group Inc. suggest an annual boost to earnings before interest, tax, depreciation and amortization of around $750 million would be conservative, adding about $4.1 billion to the company’s value.
So a transaction makes strategic and financial sense. That may explain why the reaction of BHP’s share price was relatively relaxed for a company seeking do a large transaction and pay entirely in a big dollop of stock. Meanwhile, the response from Anglo’s board was studiously neutral. The company hasn’t performed well lately and it’s not hard to see why Anglo investors might be tempted to trade into a takeover. The board would be well advised to take some soundings before rejecting BHP too aggressively.
But price and the chances of actually completing a deal amid antitrust scrutiny will be key considerations. The proposed terms see BHP offering new shares worth nearly £17 per Anglo share at the bidder’s stock price before its interest materialized. Anglo investors would also receive the spinoffs worth just over £8 a share. BHP says that’s a 31% premium for the implied value of the unlisted assets based on Anglo’s closing value on Tuesday, with the uplift more than doubling if the proposal is benchmarked against average values over the prior 90 trading days.
You can see why BHP wants Anglo shareholders to view its offer in this rather fiddly way. And the fact they will retain exposure to Anglo Platinum and Kumba, where control isn’t really changing, provides some intellectual justification.
The reality, however, is that Anglo shareholders aren’t being offered anything like a conventional takeover premium over their shares’ worth before BHP came on the scene. And in any bid situation, the value that investors can receive for all the assets they own is going to be what sits in the front of their minds. On that basis, BHP’s touted £25.08-a-share proposal is just a 19% top-up on Anglo’s Tuesday share price. A bit ho-hum.
The Jefferies analysts argue that the price for entering talks would have to be at least £28 per Anglo share, with a competitive auction potentially driving the final number “well above £30.”
Anglo has many levers to pull to get BHP to go higher. Rivals Glencore and Rio Tinto Plc will scarcely need encouraging to consider making competing proposals. And Anglo could lead its own break-up. The key question will be how best to get a proper premium for all of the company, rather than one that’s reverse engineered for part of it.
On top, Anglo’s board ought to demand that the antitrust risks here are reflected in the terms of any formal offer — whether in the headline price or a decent break fee. Regulators may take a dim view of BHP driving greater concentration in a vital commodity such as copper, taking into account an already limited number of major players.
BHP is in front here — but a long way from the finishing line.
Read also:
- Could BHP’s 10% dividend be sustainable in this economy?
- Anglo American Platinum announces 15% job cuts amidst economic pressures
- Anglo American CEO defends leadership amid commodity price slump and operational challenges
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