Anglo drops criticism of BHP’s valuation but structure still a major sticking point
Anglo is no longer quibbling about the value of BHP’s offer for its shares. A friendly deal now hangs on whether agreement can be reached on its structure.
A deal between BHP and Anglo American is growing more likely after Anglo’s board agreed to push back the deadline for a formal offer, analysts say, as Anglo dropped its complaint that BHP’s all-scrip bid undervalues its assets.
But the two companies are still locked in a stand-off over deal structure, after Anglo rejected BHP’s “final” offer overnight on Wednesday, in which Anglo shareholders would emerge with 17.8 per cent of the merged group, or 0.8860 BHP shares for each Anglo share on issue.
Anglo chairman Stuart Chambers again reiterated the company’s rejection of BHP’s deal structure, which would require Anglo to organise the divestment of its South African iron ore and platinum group assets ahead of any deal with BHP.
However, in a key sign a deal could be on the cards, Anglo dropped its previous criticism that BHP’s bid undervalued the company.
Although Mr Chambers opened the door for a deal to be thrashed out, pushing back the deadline for BHP to make a formal offer until May 29 as the two companies talk directly about the offer for the first time this week, BHP is still signalling it will not budge further on price or its deal structure.
The stand-off is likely to set the scene for further extensions to the UK’s so-called “put up or shut up” deadline, as the two mining majors look for a path to a deal that satisfies the concerns of both sides.
BHP said in its statement to the UK market that it would not bump its offer ratio further unless a third party joined the race to capture Anglo and its prized South American copper assets.
The company’s latest bid values Anglo shares at £31.11, including £5.40 in Amplats shares and £4.23 in Kumba shares, bringing the total valuation of the company to £38.6bn ($74.2bn).
Ben Cleary, portfolio manager for Tribeca Global Natural Resources Strategy, an Anglo shareholder, said the revised deal was in the right ballpark, but a fourth “knockout” bid might seal the deal.
“What I’ve consistently heard from Anglo shareholders since the day this bid was announced was that the offer needed to have a three in front of it,” Mr Cleary said.
“In my opinion, there’s an increasing likelihood of a deal happening here because the Anglo board is starting to engage. It’s getting closer.”
Mr Cleary said having the Anglo board engage with BHP was a major development towards striking a fair deal.
“As an Anglo holder I feel that we are close to fair value but it needs a fourth bid, it needs one more improvement,” he said.
BMO Capital Markets analyst Alexander Pearce said in a client note on Thursday that Anglo’s decision to push back the deal deadline increased the chances of an agreement being reached, but said BHP was already probably at its limit without diluting its own earnings through the takeover.
“The revised offer ratio is already at the top end of what BHP could pay to avoid dilution on an EBITDA basis on our commodity deck, and is net present value dilutive,” Mr Pearce said. “Significantly, however, it could imply BHP assumes a somewhat higher long-term copper price than our $US4.10 a pound (estimate).”
But with deal structure the major remaining sticking point, JPMorgan analyst Lyndon Fagan said BHP was clearly making progress and, despite its focus on the share offer ratio, still had the option to swing a deal by adding a cash component. “BHP state that this is the ‘final offer ratio’. Thus, we interpret this as meaning that BHP still retains latitude to add a (small) cash component,” Mr Fagan said.
Former BHP chairman Don Argus said the Anglo board was clearly feeling the pressure from shareholders after rejecting two earlier non-binding offers from the Australian mining giant.
Mr Argus, who was chairman of BHP from 1999 to 2010 and is a shareholder in both companies, said he would be voting in favour of the takeover. He said there would be angry shareholders if BHP decided to walk away.
“If the Anglo management and the board can’t manage the assets then as a shareholder you could understand that somebody else could manage the assets better,” Mr Argus said.
“The shareholders need to make a decision whether they want to go ahead with an approved operator like BHP, or stick with someone that hasn’t delivered for a few years.
“If you’re a short-term shareholder you should probably think hard about what you’re looking for, but If you’re a long-term shareholder then yes, you will benefit from a takeover.”
Asked if he was upset over the higher offer, Mr Argus said he was not surprised.
“Whenever you do these deals there are different scenarios,” he said. “BHP needs to consider what their balance sheets would look like with different assets and revenue streams.”
BHP shares closed down 2.9 per cent, or $1.33, at $44.91 on the ASX on Thursday.
