Anglo American blinks as BHP takes a big step closer to megadeal

BHP chief executive Mike Henry. Picture: Aaron Francis

Getting access to Anglo America’s boardroom is a major breakthrough for Mike Henry who was able to force open the door to talks by declaring his sweetened $74bn offer final.

This has given the BHP boss confidence there is now enough of a shift among the London-miner’s directors that offers a path for a deal to be done.

He is calculating that after hearing BHP’s case, Anglo’s board will come around. He too knows the London-based miner will need to offer shareholders something more than its lukewarm defence plan if it plans to send BHP and its increased offer packing.

Henry is still a long way from home, and talks in coming days will ultimately come down to how the takeover is structured.

This will involve the fate of Anglo’s two majority-owned, Johannesburg-listed South African miners. And between BHP and Anglo on how the two companies are treated under the takeover continues to be a fundamental sticking point.

Anglo issued its third rejection to BHP in London and it came after the Australian miner gave a substantial $10bn step-up to its bid.

BHP’s chief, Mike Henry has little wiggle room after declaring the revised bid final.

And by declaring his revised bid final, this prevents Henry from stalking Anglo further and stringing out another offer. It was this call that largely focused the minds of Anglo’s directors: it would be this or nothing.

BHP’s revised £31.11 per share on offer is now 50 per cent above the pre-bid price, and puts Anglo’s value into the territory where most analysts believe a deal could be struck.

It is comfortably above the psychologically important £30 barrier, making it easier for the London miner to sell to its investors.

The currency continues to be all in BHP shares, and the new offer effectively delivers Anglo shareholders 17.8 per cent of the Australian miner.

For BHP this represents a cost, but still below the all-important 20 per cent mark where Henry’s own investor base would start to push back for fear of giving away too much in the chase for Anglo’s sought-after copper mines.

As deal clock ticked down this week, Anglo’s board looked around and had to weigh up what is now a robust BHP takeover premium against Anglo’s own defence strategy that promises a high-risk break-up of key assets under an aggressive timetable. Anglo wants to sell off diamonds, manganese and platinum portfolios to become a pure copper, iron ore and potash miner.

The London miner’s board had little choice but to talk and has given Henry seven days. Now comes the hard part.

Deal breaker?

BHP’s Henry is determined to not take Anglo’s part-owned South African assets under his deal.

His plan of a simultaneous spin-out of the 79 per cent-owned Anglo Platinum and the 70 per cent-owned iron ore miner Kumba before buying out Anglo is a red line he doesn’t want to cross. Nor is his intention to push ahead without agreement from Anglo’s board, this is critical in order to conduct due diligence.

But it is this deal structure that has been a big sticking point for Anglo. The miner reiterated its opposition yet again this week.

The simultaneous demerger has “significant complexity” and “execution risk” and represents material value leakage disproportionately borne by Anglo shareholders, the Anglo board said.

It’s statements like this that make it tough for Anglo’s board to walk back from – or recommend – a BHP bid without some way to save face.

Anglo American chief executive Duncan Wanblad.

For Henry’s part, carrying these assets after an Anglo acquisition would dramatically raise the price BHP needs to pay. And with no intention of BHP being a long-term owner, it complicates the potential for a spin-out of the two businesses after an Anglo buyout.

The size of the controlling stake makes them painfully difficult to sell on market without giving away value.

By demerging ahead of the buyout, Henry believes the shares in the respective South African companies can be cleanly given to existing Anglo shareholders.

If he carried them through the deal then under a demerger, shares would have to go to all BHP shareholders. BHP’s existing shareholder base has little interest in exposure to a stand-alone South African-listed miner.

Can Anglo and BHP find common ground?

Henry has sweated the numbers and is confident the spin-out plan can be executed cleanly.

In coming days, it is likely he will point to BHP’s own track record of spinning out South32 and petroleum assets into Woodside.

Anglo American’s South American copper assets are in the sights of BHP.

At the same time, there is a history of demergers that have been effectively executed in South Africa. Indeed, Anglo itself is proposing to spin off Anglo Platinum under its own defence plan. This largely neutralises the question over the fate of one of the South African companies.

This is where Henry needs to prove to the Anglo board how this is all going to work and how any risks can be contained. There are issues like capital gains tax that BHP has said it would absorb in the spin-out, as well as any long-term liabilities. These exposures would be proportionally higher under Anglo’s smaller balance sheet if it remained independent.

Importantly, Henry will need to give reassurances to the South Africa government and its public-owned investor fund PIC – one of Anglo’s biggest backers – why these companies would be better off as stand-alone entities.

Henry has set out his terms and finally forced Anglo’s door open. Now let the talks begin.

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