The two big hurdles BHP faces in getting Anglo prize

BHP chief Mike Henry’s ‘light’ sweetener to Anglo American’s board was never expected to succeed but the question is, how much does he want this messy deal?

Anglo American’s copper mines in central Chile and Peru remain the prize for BHP. Picture: Bloomberg

BHP boss Mike Henry never really expected his “light” sweetener pitch to Anglo American’s board to succeed; rather it was a chance to engage in a round of price discovery in the £36bn ($64bn) mining deal.

Anglo’s board didn’t want to negotiate behind closed doors and quickly rebuffed the new approach that upped the price by 15 per cent. However it has left the door open – ever so slightly – for BHP to come back.

Anglo’s public comments in rejecting the sweetener have offered Henry a baseline around two big sticking points. The question for Henry is whether his own shareholders have the appetite to negotiate what could be a messy way forward.

And it all comes down to how badly Henry wants Anglo’s South American copper mines, and that continues to be the motivation for the deal.

BHP wants to diversify its earnings away from iron ore as it builds up its copper exposure. Picture: Gerrit Nienaber

BHP made the renewed all-share approach to the UK-listed base metals miner last Wednesday. By Monday morning in London, Anglo came back with a firm no.

However, this time, BHP wanted to get on the front foot by disclosing the developments to the market first. The move contrasts with the initial approach last month after BHP was caught on the hop as Anglo broke cover to disclose the deal in London. Indeed, this is now shaping up as a mega-mining deal playing out in public.

Unsurprisingly, the first clear message delivered by Anglo’s chairman, Stuart Chambers, is around price, and he regards BHP’s valuation of £27.53 as still too low. He says it fails to recognise the “value inherent in Anglo-American” as well as future demand for its key commodities.

However, BHP is betting that support for a demerger among Anglo’s shareholders is stronger than the London miner now realises.

It is true BHP is swooping at a weak point in the cycle for some of Anglo’s commodities, including diamonds and palladium, but some of the London miner’s share problems are of its own doing. These include downgrades in copper output, the capital intensity of low returning assets and the long-held refusal to clean up its complex structure.

BHP’s relatively strong share price gives it currency to move higher, although Henry will want Anglo’s investors to consider whether an Australian miner would be a more efficient owner of some of Anglo’s more prized assets.

Chambers’ second sticking point is the structure of the deal, and this represents a major obstacle. Indeed, this could be the very thing by which BHP could be prepared to walk away. The Australian miner has no appetite to take on the messy cornerstone holdings in Anglo Platinum and Kumba iron ore operations, which are both listed in South Africa.

Mike Henry, the boss of BHP.

BHP has proposed both companies be de-merged and given directly to Anglo shareholders before any deal moves ahead. Anglo’s chairman says this approach is highly unattractive for his shareholders.

The spin-off proposal leaves Anglo, its shareholders and other investors in the two companies “disproportionately at risk” from the uncertainty and execution risk under the simultaneous demergers.

Adding to the complexity is that South Africa’s government is Anglo’s biggest shareholder, with a 7 per cent stake held through its public investment fund, and it would want a big say in making sure the companies there aren’t left in a weaker position.

BHP would unlikely be a long-term holder in Anglo’s controlling stake in South African diamond giant De Beers.

Coming up with a structure that pleases everyone around the South African assets could be a tough ask for BHP.

It was significant that under its revised approach, BHP left the valuation of the two listed South African companies unchanged.

Billiton reboot?

The ever-disciplined Henry know he has more room to move on price, but after all his work in recent years ruthlessly boosting returns, he doesn’t want to go down as the CEO who delivered a reboot of Billiton to BHP’s shareholders.

Going too high on price, which gives Anglo shareholders an ever bigger proportion of the merged company – or by taking on the complex South African structure – moves BHP a step closer to the value-sapping merger of another British-South African miner more than two decades ago.

BHP has little appetite to be a long-term owner of Anglo’s partially listed South African operations. Picture: Bloomberg

Despite the revised offer, Anglo’s shares fell in London overnight to £27.13 which was slightly below BHP’s offer price, showing considerable doubt is setting in over a deal being done. BHP’s shares opened nearly 1 per cent weaker in Australia.

Still, the pressure is firmly on Anglo. It has had a horror year with downgrades in copper output, and was hurt by falling prices for its other key commodities of diamonds, platinum and palladium. Its shareholders have long criticised the complexity of Anglo and its jumbled portfolio of capital-hungry commodities.

Earlier this year, Anglo chief executive Duncan Wanblad signalled a portfolio review and declared every part of the portfolio would be put under the microscope. It is possible that through this, some of Anglo’s lower-returning commodities could be put on the block.

In response to BHP’s latest approach, Anglo has now fast-tracked its long-awaited review, with the presentation to be outlined in London on Tuesday.

This represents the next big inflection point for BHP. That is whether Anglo’s shareholders will be prepared to support its plan to remain independent and give the miner time to turn around.

Any quick asset sales could deliver an immediate cash return to shareholders, although without a fundamental restructure, the London miner’s underlying problems will surely continue.

Henry was scheduled to speak later Tuesday in Miami, at Bank of America’s annual metals and mining conference. However, his focus will be in London, where Anglo unveils its new strategy.

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Originally published as The two big hurdles BHP faces in getting Anglo prize