David McKay inside mining
No matter how you slice it, the proposed $28-billion merger between Australia’s BHP and the United Kingdom’s Billiton is a deal that functions on size.
Every stated aim of the proposal geographical diversity, range of mined products, balance sheet power, need to access capital markets accepts the notion that big is beautiful in the world of mining finance.
In a single stroke, the BHP and Billiton arrangement will be larger than 18 previous merger and acquisition deals concluded or given regulatory approval between July 1999 and December last year.
It will, for example, create a company with an enterprise value of just under $35-billion. Aggregated for calendar 2000, revenues of $18,6-billion would have been amassed in the combined company; attributable profit would have totalled $2-billion. Billions of dollars will be created in cash flow, no doubt useful in helping to finance a pipeline of capital projects worth an estimated $8-billion over the next four years. Even medium-term merger benefits total a signficant $270-million.
As if it needed saying, the architects of the deal South African Brian Gilbertson, chair and CEO of Billiton, and BHP managing director and CEO Paul Anderson say this is not principally a synergy-creating transaction.
“Given the industry dynamics, given the weakness of the Australian dollar, if BHP is not proactive it will become a victim of the consolidation,” Anderson is quoted to have said in a recent Bloomberg article.
Billiton executive director Mike Salamon was of the same opinion: be a player or be a victim was his gloss on events.
“The future of the [mining] industry belongs to the multinational companies,” Gilbertson told a three-way conference involving satellite links to London, Johannesburg and Melbourne. “Investors today want to invest in larger stocks; not some poor little niche metal company.”
The best way to add the much-vaunted ideal of shareholder value is to provide the liquidity of shares enabling investors to buy and sell quickly, provide “outstanding assets” and compete in the North American capital markets where size is most formally entrenched as a criterion for success.
More than that, expectations of mergers between international bourses, particularly between the Australian and New York Stock Exchanges, makes company visibility in both markets a strategic imperative.
Anderson agrees: “There will be three to four players that will dominate world metals supply. Then there will be more entrepreneurial minor players [for exploration] and a void in the middle,” he says.
That must make ominous reading for the five or six medium-cap mining companies Noranda, Phelps Dodge, WMC, MIM and the like. Indeed, acquisitions, as well as organic growth, will be required to keep the BHP Billiton Dreadnought forging on.
Anderson took control of BHP in 1998 when it was a company in distress. His brief was to firstly halt the haemorrhaging BHP wrote-off A$7-billion worth of assets over the past two financial years provide a strategic direction and finally, a successor. It was a five-year contract Anderson expects to close with 12 months to spare. Thereafter, Gilbertson will take the reins. For the time being there is relief and expectation.
Most analysts in South Africa, Australian and London are positive on the proposed merger. But one wonders to what extent the transaction is defensive rather than proactive: would the merger have taken place were it not for mutual fears that consolidation would result in both companies being rubbed out by a predator?
Mike Salamon of Billiton argues that the two companies have been talking about a tie-up for two years; therefore it is not a knee-jerk reaction. But would it have been so bad for Billiton to be swallowed by Anglo American, particularly if shareholders are the eventual winners? The rebuttal is that shareholders from Billiton and BHP are going to benefit anyway, while investors in general still have the luxury of choice.
That’s true, but there’s a sneaking suspicion this deal is one partly motivated by egos. One significant aspect of the BHP Billiton tie-up is that Gilbertson side-steps long-time rival Anglo American that has long sought to remove its compatriot company. (A Rio Tinto director told me once Anglo had approached Rio Tinto in 1999 about a joint takeout of Billiton.)
The hostility between the two groups escalated at the end of last year, however, when Anglo took a seven per cent stake in Billiton. Media reports say the Billiton board has been devising ways of neutralising the foothold since then. It may well have succeeded.
As for Paul Anderson, he gets to end his tenure at BHP on a particularly high note. He will no doubt reflect on the successful turnaround of the group and leave the long-term progress of the enlarged entity to another’s care.
And what of the long term? Perhaps, a few years from now, a new generation of corporate advisers whose brokerage fees make devising financial transactions the most lucrative business of all will frown on the dubious benefits of agglomeration in favour of focused, single-commodity businesses. Ironically, it was this process of unbundling that Gilbertson implemented to much acclaim at Billiton’s forerunner, Gencor.