Big Anglo American shareholders back in miner’s stance on BHP talks

A BHP and Anglo American tie-up is getting close, according to banking giant JP Morgan, and the clues are hiding in plain sight despite the target’s share price trading well below the Big Australian’s offer.

BHP has one week to convince Anglo of the value of its $74 billion acquisition plan, after Anglo announced on Wednesday it had rebuffed a third bid and agreed to extend a regulatory deadline.

With the clock reset, discussions will centre around BHP’s insistence that Anglo spin off majority stakes in South African platinum and iron ore units before the takeover can proceed.

JP Morgan told clients in a note it believes “small tweaks” to the terms of the deal could get it over the line.

“This could include lowering the exchange ratio and adding a cash component,” it said.

“BHP has emphasised the word ‘final’ many times in its announcement indicating the implied valuation of Anglo... BHP notes it reserves the right to increase the consideration if a competing offer emerges.

“We also note that Anglo didn’t state the revised offer undervalues its business in its announcement.”

Sources say the two sides are now closer to each other in their views on a valuation for a deal, Bloomberg has reported.

However, Anglo continues to dismiss the structure as too complicated — laden with risks and costs to be borne by its own investors, who will receive the offloaded shares in the subsidiaries under BHP’s plan.

That was a view echoed by several major investors in private conversations since the latest announcements. Five top-20 Anglo shareholders said they were open to the prospect of a deal, while four of those agreed with Anglo’s approach to press BHP for changes to resolve uncertainty created by the proposed multi-phase approach.

Most of the shareholders said they would want BHP to further increase its offer, particularly if the structure were to remain unchanged. Under BHP’s current plan, Anglo’s investors would need to wait for the South African spinoffs to be completed — which some estimated could take up to two years — before they would realise the value of the bid.

Anglo’s main reservation about BHP’s current approach is the uncertainty over concessions that may be demanded by South African regulators in order to approve the demergers of Johannesburg-listed Anglo American Platinum and Kumba Iron Ore. The country is home to some of Anglo’s biggest operations and the firm has deep ties there that date back to its founding more than a century ago.

South Africa’s Competition Tribunal assesses both antitrust impacts as well as “public interest” factors, including how a change of ownership will affect employment levels and historically disadvantaged people — making it extremely difficult to estimate the eventual cost to the companies. Previous approvals have hinged on conditions such as guaranteed local procurement, increased employee ownership and even permanent restrictions on job cuts.

South Africa’s state-owned Public Investment Corporation, which is Anglo’s second-largest shareholder with 7.4 per cent, issued a statement on Wednesday before the latest BHP and Anglo announcements, calling for “meaningful revision” to the takeover proposal at the time. It has yet to publicly comment on BHP’s third bid or the ongoing negotiations.

BlackRock, which owns 10.5 per cent, has not commented publicly on its position. Nor has activist investor Elliott Investment Management, which has emerged as one of Anglo’s biggest shareholders.

Of the investors that Bloomberg spoke to this week, some suggested that BHP should provide a commitment to cover any lost value suffered by the subsidiaries’ new owners as a result of the spinoff process, or alternatively sweeten the all-share offer with a cash component.

Two of the shareholders — who want changes to the deal’s structure — also said that BHP walking away on May 29 could still produce a positive outcome.

Under its own turnaround strategy, announced last week, Anglo is planning to exit platinum, diamond and coal mining to focus on iron ore and copper operations — a streamlining that investors were already urging upon the company and say could create a more valuable asset if Anglo is able to execute the plans.

Anglo American dropped 2 per cent on Thursday in London to £26.455 a share, trading about 11 per cent below the current value of the latest BHP proposal.

Bloomberg