Will BHP go all the way under ‘Plan B’ to win Anglo’s copper prize?

As the deadline approaches on the mega merger, the Australian giant’s CEO is mulling a new path to save his $64bn deal.

The deal deadline is fast approaching for BHP as its chases London-listed Anglo American. Picture: AFP

What is it going to cost to just get a ticket to the big miner’s dance?

BHP’s calculating chief executive Mike Henry will be working this over and over as the clock ticks down on his mega-mining deal that has hit a stalemate.

Anglo-American’s board holds all the cards in the $64bn merger that stands to turbocharge BHP’s copper ambitions.

There was no breakthrough between the two companies on the weekend, and this means Anglo is keeping the door closed as it banks on its own break-up defence plan being enough to keep shareholders onside.

BHP chief executive Mike Henry. Picture: NCA NewsWire / Aaron Francis

BHP’s Henry has until Wednesday afternoon in London to try and convince Anglo’s board to agree to talks and stop the clock under UK takeover rules. If he fails, he either has to go hostile (not an option) or go away for six months and possibly lose out on a rising copper cycle. So who is going to blink first?

One way he is going to do this is by going for a third sweetener in as many weeks under his current £27.53 all-share offer. This path is widely expected in London, with some analysts there suggesting BHP would need to do something meaningful, such as push the price to as much as £30 to get a fully agreed deal. That’s a big ask.

Plan B?

The second option, Plan B, and one that Henry could still surprise on, follows a gruelling meeting with more than 70 BHP and some Anglo investors at the Bank of America metals conference in Miami last week.

This plan involves BHP doing the heavy lifting on the break-up of Anglo.

That is BHP buying the smaller miner “as is” and selling off the operations in a patient, methodical way over time.

Indeed, BHP could even team up with arch rival Glencore for a quick sale of coal.

Remember, Henry’s first two approaches to Anglo involved the simultaneous spin-out of the 79 per cent-owned Anglo Platinum and the 70 per cent-owned iron ore miner Kumba before BHP sealed the deal.

London-based Anglo American is running down the takeovers clock as it attempts to go it alone.

Both Anglo offshoot miners are listed in South Africa and BHP has little interest as a long-term owner. Anglo last week strongly pushed back on the demerger option, arguing this unfairly put too much risk on the London miner’s investors. Even with a price sweetener, this structure could remain a big sticking point.

BHP crunched the numbers on Anglo’s radical break-up proposal and, through the shareholder meetings in Miami, Henry has indicated that investors in the London-based miner could be leaving as much as $US4.3bn ($6.4bn) on the table under its big defence strategy. The discount comes about from the need for Anglo to rush through sales, particularly while commodities like platinum or diamonds are tracking at cyclical lows. And this haircut could help fund BHP’s deal over time.

Anglo’s chief Duncan Wanblad last week outlined plans to sell or demerge much of his miner’s operations from DeBeers diamonds, metallurgical coal and, like BHP, demerger the listed AngloPlats. Nickel, which is struggling with a price slump, is to be put on care and maintenance.

This would see Anglo emerge as a pure copper and iron ore miner, with a potash business still to be built out. Wanblad is in a hurry, and Anglo’s cash demands mean he needs to get most of this done by the end of next year.

All the way

One argument for Henry ‘going all the way’ with Anglo is that BHP has the balance sheet to absorb the rival and fund the miner’s operations, even as some would be earmarked for sale. This path removes the risk test for Anglo’s shareholders and means BHP’s Henry wouldn’t necessarily be bidding against himself. It also neutralises Anglo’s entire defence, given BHP is widely seen as more experienced handling an asset sale.

The big negative to Plan B is it will be a big ask for Henry’s shareholders to face possible earnings dilution in the near term to get to the prized copper assets.

To fund the full $64bn takeover would see Anglo shareholders emerge with more than 22 per cent of the Australian giant. The current proposal gives 16 per cent of BHP to Anglo shareholders, against Anglo roughly generating a third of BHP’s earnings.

A ratio like this would be weighed against the long-term value of Anglo’s copper assets and Brazilian iron ore.

Anglo American chief executive Duncan Wanblad.

At the same time, years of big ticket mine sales would be good for bankers, but represent another layer of management distraction and regulatory headaches for an already complicated deal. BHP is already building a copper province in South Australia and has a near $US11bn capex spend on developing its potash mine in Canada.

Henry talked up BHP’s ability to pull off complicated deals, such as the recent petroleum sale to Woodside, and a long track record of demergers.

Henry has threatened to walk away if he doesn’t get what he wants from Anglo. The London miner’s shares are starting to factor this in as they continue to trade at a discount to £27.53

The question is, can the BHP boss really take all of Anglo while keeping a claim to discipline?

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Originally published as Will BHP go all the way under ‘Plan B’ to win Anglo’s copper prize?