BHP proposes an all-share offer for Anglo American at a 31 percent premium

BHP hostile bid for Anglo American

BHP has announced that on 16 April it advised the Anglo American Board of the intention to formally propose an all-share offer of 0.7097 of a BHP share for one Anglo American share, plus a pro-rata distribution of Anglo American’s shareholdings in Anglo American Platinum (Anglo Platinum) and Kumba Iron Ore (Kumba). The offer is worth 25.08 GBP per Anglo American share, valuing Anglo American’s share capital at 31.1 billion GBP. The offer represents a premium of 31 percent on the implied market value of Anglo American’s unlisted assets that comprise Anglo American’s assets excluding its shareholdings in Anglo Platinum and Kumba. These assets are separately listed on the Johannesburg stock exchange. BHP has indicated it has no interest in acquiring these assets which will remain with Anglo American shareholders.

BHP plans to implement the proposed offer by way of a Scheme of Arrangement. The combination of BHP and Anglo American would create the world’s largest mining company.

BHP’s indicative offer values Anglo American at 25.08 GBP per share when the separately listed Anglo Platinum and Kumba Iron Ore assets are included. With these assets included, the offer is equivalent to a 14 percent premium to Anglo American’s closing share price on 24 April. Anglo American shares are currently trading at 25.94 GBP.

Anglo American shareholders will see BHP’s bid as highly opportunistic given that in 2023 shareholders were offered 35 GBP a share before operational issues emerged. Then in early December 2023 Anglo American shares fell 29 percent in a week to 16.37 GBP from 23.11 GBP. The share price drop was precipitated by the mining giant stating it planned $1 billion in cost savings in response to macroeconomic and market conditions. The cost savings would result in production volume cuts of 4 percent in 2024 and 3 percent in 2025 across a range of metal products.

BHP strategic rationale for takeover

Acquiring Anglo American will give BHP about two million tonnes or 10 percent per annum of annual global copper production, as well as a presence in the world’s top copper producing countries, Chile and Peru, which are home to the world’s largest copper mines. This is BHP’s primary strategic objective because it improves BHP’s exposure to copper by about 40 percent. Copper is a critical element of the world’s ongoing energy transition given its use in electric vehicles, grid infrastructure and data centres.

What’s next?

Under UK takeover rules, BHP is required to either make a firm offer for the 107-year-old company by May 22 or walk away. A higher bid and improved offer terms from BHP that may include a cash component are likely to materialise in the weeks ahead.

There is also the real potential for a rival bidder to emerge. Rio Tinto with a market capitalisation of A$178 billion has the economic firepower to launch a competing bid for Anglo American, that has a much lower market capitalisation of A$67 billion. BHP’s market capitalisation is A$221 billion.

The view that an improved or a rival bid will emerge for Anglo American is reinforced by current Hedge Fund activity speculating on a higher offer. Activist Hedge Fund Elliott Investment Management has quietly built a $1 billion equity stake in Anglo American over the past few months. The stake puts the Hedge Fund as one of Anglo American’s top 10 shareholders. Elliot Investment Management has a history of profiting from mining shares, including a few years ago when BHP divested its oil and gas portfolio to Woodside Petroleum to create a global energy company.

Hedge Fund activity in BHP shares

There is clear evidence of recent elevated levels of current Hedge Fund activity in BHP shares. This is indicated by the simultaneous increase in the value of short positions on BHP shares just as the news of the Anglo American bid by BHP has been made public. As of 19 April, reported BHP shorted value was $1.15 billion. This shorted amount may continue to rise in the weeks ahead as short positions are reported to ASIC with a lag period. Short-sellers of BHP shares are selling on the expectation that post any merger with Anglo American, the share price of a larger BHP will be higher than the shorted BHP share sale price. Apart from the synergies that are likely to arise post-merger, forced index re-balancing and buying by mutual funds and ETFs arising from the significantly greater market capitalisation of BHP will also support a higher post-merger BHP share price. At this point, Hedge Funds can profitably close out their short BHP positions by selling their BHP shares at the higher share price. This Hedge Fund strategy is known as takeover arbitrage or merger arbitrage and is a common occurrence in global scrip-based merger and takeover transactions.

BHP shareholders may be in for an interesting and potentially volatile couple of months as the BHP – Anglo American takeover proposal plays out. The BHP share price may continue to come under short-selling pressure, although at some future date these short positions must be covered. This may occur as planned, should the BHP – Anglo American takeover proposal result in a merger of the two companies. Alternatively, if the merger doesn’t proceed, the short positions in BHP will still need to be covered, resulting in a short covering rally as the shorted stock is re-purchased at market prices.

For investors who are passive, long-term BHP shareholders, there is little that can be done while this proposed transaction plays out. However, understanding the reason for the BHP share price volatility reduces some of the anxiety that may otherwise arise as the BHP share price experiences elevated volatility levels in the months ahead.