BHP’s abandoned Anglo American takeover bid a major blow to copper ambitions
Following BHP’s efforts to rekindle talks last week, Anglo’s position remained unchanged: yet again rebuffing chief executive Mike Henry’s advances.
Anglo is in a considerably stronger position than this time a year ago. It has an agreed deal – a merger of equals with Canadian copper-zinc miner Teck Resources – that under a $US57bn combination makes both second-tier majors significantly more takeover-proof.
That Anglo-Teck deal was struck in September, a little over a year after BHP was sent packing the first time around. With a shareholder vote on the Anglo-Teck deal scheduled for two weeks from now, BHP was genuinely facing its last opportunity to make a move on Anglo. If so keen, it’s perplexing why BHP left its run so late.
There’s little doubt the Teck merger represents a strategic blow to BHP’s copper ambitions.
Last year, the Australian miner was prepared to navigate the complexity of carving-up Anglo to get access to its South American copper deposits. Although it clearly wanted the London miner to do all the heavy lifting by divesting African platinum and iron ore businesses before any takeover, which became a big sticking point for Anglo’s board.
Teck boasts substantial copper reserves with plans to boost production over the coming decade. The combination of Anglo and Teck see the emergence of a top five global copper producer
For BHP, this all represents a stab in the heart with a copper knife.
BHP on Monday said it was “no longer considering” a takeover of Anglo. That statement carries substantial weight under the UK’s strict takeover rules and was behind the BHP modest share price rally.
BHP’s investors clearly have no appetite to revisit the protracted uncertainty of an on-again, off-again deal with Anglo that would come at a cost.
The other challenge for BHP would have been the need to pay a substantial premium – even well above last year’s sweetened bid – to force open the door for negotiations.
Anglo shares have rallied on the Teck deal (as well as the long promised portfolio clean-up) and currently trade at approximately 24 times forward earnings, compared to BHP at just 13 times.
Even with BHP’s improved offer last year, Anglo was trading at 19 times forward earnings. Prior to the initial approach last year, the positions were reversed, with BHP’s shares fetching a premium where Anglo traded at a discounted 14 times earnings. Remember, much of the value in BHP’s initial bid was captured in the currency of its own shares making it hard to extract value when its starting a long way behind.
Is BHP and Anglo now all over? Yes and no.
Reading between the lines, several significant carve-outs in BHP’s statement could still provide an opening – although a very narrow one.
These include: Anglo’s board reversing course and agreeing to substantive discussions; a competing bidder such as Glencore or Rio Tinto launching their own offer; or finally, a material change in circumstances regarding the Anglo-Teck combination.
The first point is significant.
BHP now has a new chairman, former National Australia Bank chief Ross McEwan, who previously led the UK’s fourth-largest bank, NatWest Group (formerly RBS), and maintains extensive connections within London business circles.
Fresh approaches at senior levels may ever so slightly shift the dynamics. Still, Anglo’s board was just as quick to close the door on the latest approach.
The remaining scenarios – a rival takeover or collapse of the Teck deal – remain beyond BHP’s control and are largely dependent on circumstances.
For now, expect BHP to talk up its own copper prospects, reminding shareholders it controls some of the world’s largest deposits. US copper zinc gold miner Freeport-McMoRan could be one option, although at more than $US55bn that’s a serious commitment.
BHP has four major copper bets underway: fast-tracking development studies on greenfield copper deposits in Argentina; progress on the slow-moving but substantial Resolution mine in the US, which appears to be advancing with President Donald Trump’s blessing; significant copper reserves in South Australia centred on Olympic Dam; and substantial investment to extend the productive life and capacity of the jointly-owned massive Escondida mine in Chile.
Nonetheless, the renewed interest in Anglo sends a clear signal to investors. BHP is adopting a more bullish position on copper – the metal underpinning industrialisation and electrification – relative to iron ore.
BHP has flagged that peak steel production in China is approaching, after which demand for ore will stabilise and gradually decline – and that means an impact on prices. An Anglo buyout, depending on price, could have pushed copper’s contribution to BHP’s earnings above 55 per cent, from approximately 43 per cent currently.
However, the Anglo path to copper dominance is rapidly closing. After next month’s vote, it gets closer to point of no return.
johnstone@theaustralian.com.au
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There was little doubt the flame remained burning inside BHP following last year’s spurned tie-up with London’s Anglo American. And the Australian miner was confident it could bide its time. Now it’s missed its chance altogether, with a fumbling approach that’s come far too late.