It’s almost certainly the beginning of the end for De Beers as a listed firm. But what of the Oppenheimer bid’s strange omissions to shareholders ahead of its victory?
Stewart Bailey
The bid by the Anglo/Oppenheimer-led DB Investments (DBI) consortium to take De Beers private seems a dead certainty after the South African Reserve Bank refused to consider an alternative restructuring of the diamond group without the consent of management.
The ruling by the Reserve Bank has effectively removed the threat that De Beers shareholders, advised by brokerage Barnard Jacobs Mellett (BJM), posed to the deal. The dissident shareholders have been pushing for a straight unbundling of De Beers’s shareholding in Anglo American.
Representing 25% of De Beers shares, the shareholder consortium has contended that the offer to buy De Beers at $43 a share was too low, and that a straight unbundling (independent of the DBI offer) would provide a better long-term future for the diamond company.
BJM presented this case to the Reserve Bank, which refused to consider the alternative without the cooperation of management.
But De Beers management has been a staunch supporter of the Anglo bid since it was first announced and was never likely to support an alternative plan. Moreover, De Beers’s share option scheme will realise a clear profit of $200-million once the deal goes through not a huge incentive for management to present a less lucrative alternative.
Senior executives’ eagerness to see the deal go through unopposed was further evidenced by their support for the first Anglo offer, which they considered fair and reasonable. They left it up to shareholders to scrap for a higher offer on their own.
But the real gripe among shareholders is the lack of options presented to them by management, which has long known of the urgency of eliminating the cross-shareholding between the companies.
Inexplicably, De Beers told BJM that the straight unbundling option had never been pursued due to a “lack of resources”, a strange argument coming from the biggest diamond company in the world, with close on $3-billion in cash on its balance sheet. It also raises the question of what management would have done if DBI had not made an offer.
De Beers has also argued that the straight unbundling would strip it of its premier credit rating, which allows it access to a credit line of about $3-billion. It says the banks’ generosity is based on the security that the large Anglo shareholding provides. BJM says it would have called for the unbundling only of the Anglo shares held by De Beers Consolidated Mines, the locally listed unit of De Beers.
DBI chair Nicky Oppenheimer (also the chair of De Beers) has told investors on a number of roadshows that the unbundling was likely to be rejected by the government, despite having never broached the topic with the Department of Finance or the Reserve Bank.
His analysis is at odds with the “positive” advice on the straight unbundling that BJM says it was given by consultant Arthur Andersen and South Africa’s largest corporate law firm, Werksmans. However, Oppenheimer did have talks with President Thabo Mbeki before the deal was announced and perhaps received an inside track on the state’s intentions during that meeting.
Without the support of De Beers’s management, BJM has been forced to concede defeat. Voters are unlikely to try to scupper the deal without some degree of certainty that the resultant downside in the share would be capped by the prospect of a value-enhancing unbundling. The removal of one of the final remaining doubts hanging over the deal is reflected in the De Beers and Anglo share prices.
Given that the largest shareholders have signalled their intention to vote for the deal and the BJM threat has been removed, it looks like the fat lady has started warming up for her final chorus to be performed at the special De Beers shareholders’ meeting on May 18.