Shadow boxing on as BHP eyes being crowned world’s copper king

It took the board of UK-based mining giant Anglo American less than a week to rebuff suitor BHP’s $64 billion revised takeover, which it branded overly complex and under-generous.

The game of takeover shadow boxing is now truly under way.

Will BHP chief executive Mike Henry be crowned the world’s copper king?

Such a comprehensive rejection will certainly focus the mind of BHP’s board on the strength of its ardour for its target – a somewhat ungainly and recently underperforming mining conglomerate whose copper division is its crown jewel.

Seizing this crown would deliver BHP the undisputed title of the world’s copper king. And it will be keeping its eye on that prize.

For its part, Anglo American has to also carefully read its suitor and gauge how far BHP can be pushed before walking away.

At this point, Anglo is playing the reluctant bride. It scoffed at BHP’s initial overture which, to be fair, was widely considered to be on the low side, price wise. The revised offer was met with a similar lack of enthusiasm and a refusal to engage in any negotiations.

Anglo has a duty to shareholders to walk the fine line of pushing BHP to pay more but not pushing it away.

But Anglo has another line of defence – that the structure of the BHP offer, which is conditional on the simultaneous demerger of two Anglo-controlled South African companies, is messy and creates a higher level of execution risk.

For its part, BHP has dangled the carrot of offering to pay the tab for Anglo’s demerger and other transaction costs.

Of course, the sure way to overcome both obstacles is for BHP to offer a price that is too generous to refuse.

But how far is BHP prepared to go?

Its revised offer represents a premium of around 30 per cent to the price at which Anglo was trading before news of the offer leaked – which in financial parlance is called the “undisturbed price”. (Because BHP is offering its shares as payment to Anglo shareholders, the value of its offer fluctuates a bit.)

This isn’t a knockout price, but it’s within the scope of a normal takeover premium. There would be some Anglo shareholders happy enough with this, but Anglo has a duty to shareholders to walk the fine line of pushing BHP to pay more but not pushing it away.

BHP’s shareholders don’t want to see the company overpay, and need to trust that chief executive Mike Henry will be disciplined enough to walk away and avoid sticker shock.

Anglo has one further line of defence. It can convince its shareholders that it can grow the company itself and improve earnings organically.

BHP makes square sheets of copper metal at Olympic Dam in South Australia.Credit: Andrey Rudakov

In rejecting BHP’s revised offer this week, Anglo said its shareholders “are well positioned to benefit from increasing demand from future enabling products while the increasing capital intensity to bring greenfield supply online makes proven assets with world-class resource endowments ever more attractive. The Anglo American team is focused on delivering against its strategic priorities of operational excellence, portfolio simplification and growth and is set to accelerate delivery in order to unlock this inherent value.”

It’s a pretty motherhood statement that lacks any detail on how this could be achieved.

So the pressure will be on the Anglo board to put some meat around those lofty aspirations and make them credible enough to convince shareholders that they can create the same kind of value (in the short to medium term) as BHP is offering today.

Anglo could also rustle up some alternative offers and there has been talk of others, such as Rio Tinto and Glencore keeping a watchful eye on proceedings, but nothing concrete.

BHP will argue that its track record demonstrates it would be a more able steward of Anglo’s assets.

Sure BHP has made some poor acquisitions over the past couple of decades, but Henry and his most recent predecessor, Andrew Mackenzie, haven’t fallen into that trap.

So let’s compare the pair (of companies).

In 2001, BHP and Anglo had roughly equivalent market capitalisations – $US21 billion and $US22 billion, respectively. Today, BHP has a market capitalisation that is 3½ times that of Anglo.

And over the past three years, BHP has delivered a total shareholder return (measuring share price growth plus dividends) of 54 per cent versus Anglo, where total shareholder return has fallen by 18 per cent.

It is now a question of third time lucky for BHP, who are considered likely to make one more attempt to lure Anglo over the line with another upwardly revised offer.

Mark III would be difficult for the Anglo board to refuse.

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