JCI’s deal with Anglo is just the first step to realising its Lonrho ambitions, reports Madeleine Wackernagel
MZI KHUMALO is not one to give up easily. Just three days after merger talks were called off by Lonrho, he was back on the phone to Nicholas Morrell, Lonrho’s chief executive, requesting another meeting, this time armed with an option to buy a 26,8% stake in the London-based group. Sources in London say merger talks will resume soon.
The news that Anglo American was selling its Lonrho shareholding to JCI took the markets by surprise. Market talk had centered on a tie-up between the groups’ coal interests once it was clear a full- blown merger was off.
The latest deal, which gives JCI the option to purchase the combined holdings of Anglo, De Beers and Southern Life in Lonrho at 155pence a share (R11,64), or a total R2,5- billion, to be exercised in December, was presented as an elegant solution for all parties concerned. But it raises more questions than answers.
Certainly, it gets Anglo out of its platinum pickle with the European Union (EU), which had ruled that its stake in Lonrho should be kept below 10% because of competition concerns. The EU will still have to approve this deal, however. Questions may arise over cross- directorships between Anglo and JCI; the EU had stipulated that the stake should not be sold to any Anglo-related company. Thus, a boardroom reshuffle at JCI may be on the cards.
And while it serves Khumalo’s ambitions to merge with Lonrho, the amount of influence he will be able to exert over Lonrho’s restructuring plans is not clear. Particularly when there is a growing chorus of voices calling for him to concentrate on sorting out JCI first.
“He is obviously very ambitious but there is a perception that he should consolidate his position at home and focus on streamlining JCI’s operations before launching into mergers and takeovers,” says one analyst.
Another obvious problem is the issue of financing. The complicated pyramid structure behind Khumalo’s Capital Alliance Group purchase of Anglo’s stake in JCI does not augur well for a rights issue.
“The falling share price is a reflection of the market’s unhappiness with the JCI structure,” says an analyst.
The only option then, is asset sales, but disposing of JCI’s stakes in Amplats and Johnson Matthey will not cover the whole purchase price, say insiders. JCI has signalled its intention to become a gold- focused group, so selling off the Tavistock coal operations and Consolidated Metallurgical Industries would fit into the group’s long-term plans.
Khumalo has six months to convince the markets he is on the right track.
“The Lonrho deal will only make sense in terms of adding value to JCI if Khumalo gets the company back on track. JCI’s management must concentrate on operational issues; once that is seen to be working, the market will be more favourably inclined towards the group,” says an analyst.
Judging by initial market reaction, Khumalo has a long way to go. Lonrho’s share price was given a much-needed lift but JCI fared less well, being stuck at around R34, the reason being that once again JCI has paid over the odds. Lonrho shares were trading at 141,5p at the time of going to press, against a recent 129p, while Khumalo will be paying a whopping 155p a share.
Logically enough, the market is driving the share price higher, in the expectation that JCI will be seeking to increase its stake on the road to full control.
The upheavals in the local mining industry are not over yet, however. While this deal may have stalled any possible tie-up between Lonrho and Gencor or Avmin, the issue of Anglo’s determination to win Lonrho’s stake in Ashanti, Ghana’s rich gold mine, is still wide open. Anglo may yet be pipped to the post by Gold Fields; a merger between its Tarkwa mine in Ghana and Ashanti would make good commercial sense but there are doubts over Gold Fields’ management capacity.
The next episode in the restructuring of South Africa’s mining industry will focus on Cyril Ramaphosa and Nail, tipped to take over Gold Fields.