BHP US$64 B revised takeover proposal for Anglo American rejected.

Anglo American rebuffs BHP raised offer

BHP’s revised proposal to offer 0.8132 BHP shares for each Anglo American share has been firmly rebuffed by the Anglo American Board. The original proposal provided to Anglo American on 26 April of 0.7097 BHP shares valued Anglo American at 25.08 GBP per share. The revised terms value Anglo American at 27.94 GBP per share, an increase of 11.4 percent or about US$5.5 billion, taking the bid amount to US$64 billion. The higher merger exchange ratio results in Anglo American shareholders owning 16.6 percent of the combined group, up from 14.8 percent under the initially proposed exchange ratio. The current Anglo American share price is 26.56 GBP.

BHP’s proposal also requires Anglo America to complete the demergers of its shareholding in Anglo American Platinum and Kumba Iron Ore to Anglo America shareholders as a condition of the takeover Scheme of Arrangement becoming effective.

Activist Hedge Fund is on Anglo American register 

Elliott Investment Management is an activist Hedge Fund with about $100 billion in assets under management with a specialty focus on mining deals. The Fund currently owns 2.5 percent of Anglo American worth more than A$1.5 billion. Interestingly the former chief executive of Newcrest Mining is responsible for initiating hedge fund transactions within the mining sector for the Hedge Fund.

Elliott Investment Management are astute investors and began investing in Anglo American at about the time Anglo American announced a strategic review of their portfolio of mineral assets and a cost-out program aimed at improving profit performance. Anglo American’s mining activities currently include copper, iron ore, coal, platinum, diamonds, and potash. Copper currently comprises about 30 percent of Anglo American’s total production. The announcement of a strategic review usually implies the divestment of non-core assets and the cancellation of unprofitable projects. This streamlining of activities often unlocks hidden value in companies, and this most likely attracted Elliott Investment Management to Anglo American. It may have also piqued BHP’s current  interest in the global mining conglomerate.

What’s Next 

Under UK takeover laws, BHP has until May 22 to formalise its proposal and make a formal takeover offer to the Anglo American Board, or walk away. BHP are likely to formalise their proposal into a higher offer with less complexity than their current proposal. The BHP current proposal is an all-share offer and requires Anglo American to demerge its entire shareholdings in its South African-based platinum and iron ore businesses. The demerged assets would be divested to existing Anglo American shareholders on a pro rata basis and be listed on the Johannesburg Stock Exchange. This would require South African government regulatory approval. BHP have stated the South African regulatory authorities are looking closely at the merger proposal and consider they have a constructive relationship with the South African regulator and do not envisage regulatory hurdles.

The merger proposal is strategically important to BHP as it seeks to gain exposure at scale to the future-facing commodities of copper and potash to complement its existing iron ore and metallurgical coal production activities. The merger would make BHP the world’s largest mining company and give BHP about 10 percent of annual global copper production.

The combined entity would benefit from procurement, supply chain, operational and marketing synergies while the combined global listing of an expanded BHP on the ASX, London, Johannesburg, and New York Stock Exchanges would provide monthly share trading liquidity of approximately US$14 billion. BHP monthly share trading turnover is currently about US$10 billion.

The merger opportunity represents a quantum leap for BHP, and it will not give up easily on the merger plans now in play.

However, a significant barrier to the merger proposal in its present form winning Anglo American investor approval is its complexity. The requirement by BHP that the demerger of Anglo America’s entire shareholdings in its South African-based platinum and iron ore businesses occur immediately before the Scheme of Arrangement for the merger with BHP becomes effective is an unacceptable risk for Anglo American shareholders. This represents execution risk for the Anglo American Board and until the proposed offer terms are amended to transfer this risk from Anglo American shareholders to BHP, Anglo American are unlikely to commence constructive dialogue with the BHP Board.

The final outcome may be that Anglo American divests its interests in diamonds and platinum and other non-core assets, enabling BHP to raise its offer for a simpler Anglo American business that would then have a sharp focus on copper production. This would increase the value of Anglo American shares and justify a higher offer price from BHP.