Long game: BHP takes $60bn pitch directly to Anglo American’s investors

Anglo American had been on BHP’s radar for years – not months – although the Australian giant believed it had to get its own house in order before any mega-deal.

BHP has its eyes on Anglo American’s lucrative copper assets, including Quellaveco in Peru.

Anglo American has been on BHP’s radar for years – not months – but the Australian giant believed it had to get its own house in order on investment returns and M&A performance before it could make such a big-ticket acquisition spanning multiple commodities and jurisdictions.

However, there have been growing calls this year from Anglo’s own frustrated shareholder base, demanding the London-headquartered miner improve returns. And with a break-up of the copper-to-coal miner on the cards, BHP pulled the trigger on its huge takeover that values Anglo at £31bn ($60bn).

BHP’s stalking of Anglo over the long term suggests it has already done extensive work on how Anglo’s disparate operations are likely to fit in with BHP’s own longer-term strategy, which is built around so-called future-facing commodities. BHP will have had time to consider all combinations and markets and know exactly which assets it wants to keep and where the longer-term value will come from. Importantly this will guide the Australian miner’s threshold for price.

Anglo American rejected BHP’s approach on Friday, but this hasn’t thrown the Australian miner off the scent.

BHP CEO Mike Henry. Picture NCA NewsWire/Aaron Francis

And while Anglo broke cover by pushing the confidential talks into the market ahead of its annual meeting this week, BHP is more than ready to play the long game.

BHP is expected to use the coming weeks to put its case directly to Anglo’s investors around the long-term strategic merit of combining the two. And this will involve three points.

The Australian miner will argue it has the balance sheet to accelerate investment for growth in the top-tier commodities, copper, Brazilian iron ore and metallurgical coal. Anglo’s share­holders will benefit from this as they opt to fold their holdings into BHP.

Second, BHP sees its core commodities as complementary to Anglo’s. However, BHP believes its stronger track record in productivity and its ability to operate big assets will bring about an immediate uplift in returns across Anglo’s portfolio. Indeed BHP’s ruthless focus on return on investment under CEO Mike Henry will help sway Anglo’s shareholder base. The expected cauterisation of BHP’s nickel losses remains a case in point.

Finally BHP is offering Anglo’s investors the chance to remove the conglomerate discount weighing on the miner, unlocking the South African and separately listed platinum and iron ore assets through a demerger, with their respective cash flows being used to fund improved dividends or capex.

The two miners already have some overlap between large shareholders and BHP expects this well help its case.

Anglo American chief executive Duncan Wanblad.

At the same time BHP has been telling its own shareholders it will remain disciplined on takeovers, although investors involved in these discussions believe BHP would be open to enter talks on price or deal structure in order to secure endorsement of the Anglo board. For BHP, Anglo is not a deal at any cost and walking away is also live option.

The proposal, which remains non-binding and indicative, is an all-share offer and would be preceded by demergers of Anglo’s holdings in two South African-listed companies. This is the 78 per cent-owned Anglo American Platinum and 70 per cent-owned Kumba Iron Ore. Under British rules BHP has until May 22 to “put up or shut up” and proceed with a firm offer. That’s why talks with Anglo’s investors in coming weeks remain so critical. Under the all-share deal, Anglo investors will own nearly 15 per cent of BHP.

With the bid delivering immediate pre-bid premium to Anglo’s listed assets of just under 14 per cent, it falls well short of a knockout value. There is a view BHP will have more work to do to get across the line. Anglo’s investors also face risks from a move into BHP, given the lack of inclusion in European indices and possible competition issues around the world.

For BHP, Anglo’s world class but under-invested copper mines in South America have long been the prize. There’s also high grade iron ore in Brazil, albeit of modest size. Anglo also has metallurgical coal assets in Australia that can share costs with BHP’s Queensland operations. These are “nice to have” but not the fundamental driver of the deal.

There is a grab-bag of other assets that BHP will need to buy in order to get the copper, and this includes nickel, diamonds and manganese.

There is a chance BHP could hold the manganese assets – indeed, it previously owned the other side of the same asset through a joint venture, prior to spinning them off into South32 – so there could be value to be extracted. There is a possible case for Anglo’s emerging British fertiliser businesses working with potash, although BHP is not regarded as a long-term owner of Anglo’s diamonds or even nickel.

Several important steps needed to happen before making the Anglo move.

The collapse of BHP’s dual-listing vehicle two years ago has given it the ability to launch acquisitions using its own shares, delivering it the firepower needed to undertake major acquisitions.

A truck transports copper at the Anglo American Los Bronces copper mine in central Chile. Picture: Bloomberg

The relatively seamless $9.6bn all-scrip move on OZ Minerals two years ago and the mega demerger of oil and gas (sold to Woodside) before that also gave BHP’s board confidence about acquisitions under Henry and his management team.

There is a recognition that taking on Anglo is the next level of risk, with multiple commodities with different levels of value, ­operating across multiple jurisdictions.

Finally, Henry wanted to be confident that BHP had its own investors onside. And this meant delivering the right balance in terms of shareholder returns and capex investment for future growth. And it comes back to the miner’s record on productivity.

While BHP has been following Anglo for the long term, the miner flashed brightly on BHP’s screens in December when it warned it was curbing production of iron ore in South Africa and copper in Chile due to bottlenecks. Anglo slashed capital spending to preserve cash, although this would hurt the miner’s longer-term growth prospects. That saw Anglo’s shares crash 20 per cent, pushing below £17, the lowest level since the early days of the Covid pandemic.

BHP held fire in December, given Anglo’s shareholders would have strongly resisted an approach. However, with the smaller miner struggling to change the narrative in the past five months – even with a recovery of copper prices – BHP felt Anglo’s shareholders were more willing to consider the approach.

Top-level talks with the Anglo board began on April 16, with details of the BHP offer emerging a week later.

With Anglo’s board and management already under pressure from its own shareholders for strategic change, BHP has put the ball firmly in their court.

However, the risk for BHP is that Anglo blinks and sells off some of the prized assets that could put a hole in the value of its offer. Anglo shares closed Friday at £25.84

BHP’s Henry and Anglo’s chief Duncan Wanblad are scheduled to speak at Bank of America’s global metals conference in Miami on May 14. Both will have plenty to talk about.

johnstone@the australian.com.au

Originally published as Long game: BHP takes $60bn pitch directly to Anglo American’s investors