Ken Gooding in London, Barry FitzGerald in Melbourne and Tim Wood in New York
Australian-headquartered BHP, the world’s fourth-largest resources group, and United-Kingdom-listed Billiton, the seventh-largest metals and mining company, announced earlier this week that they are to merge to “establish a premier diversified global resources group”.
BHP Billiton will have a combined value of more than $28-billion with sales of $19-billion. By market valuation, BHP Billiton leapfrogs rival miners Anglo American and Rio Tinto. In terms of overall resource groups, it would place second to American aluminium giant Alcoa, which has a market cap of $30,2-billion. The new group pegged its enterprise value at $35-billion. By fiscal 2003 the merger is expected to deliver pre-tax benefits of $270-million.
The deal priced Billiton at $11,6-billion, a 21% premium to last week’s closing price. That may engender some grumbling among BHP shareholders, but they will take succour from lower corporate debt yields that the combined entity has already secured from the market. That should translate into higher earnings and better dividends, with a better rating for their stock relative to competing resource companies.
Headquartered in Melbourne, BHP Billiton will maintain separate primary listings in London and Sydney. Secondary listings in Johannesburg and New York will also be retained. A “significant corporate management centre” will be maintained in London, where Billiton is based, according to a company announcement. Additional offices will also be kept in Johannesburg and Houston.
Paul Anderson, managing director and CEO of BHP, will be CEO for the combined group with Billiton CEO Brian Gilbertson taking the role of deputy CEO. Gilbertson will take over the senior role when Anderson retires next year.
BHP discussed a merger with Rio Tinto a year and a half ago but terms could not be agreed on. Market talk began to circulate soon afterward that BHP and Billiton were courting. The speculation was given additional impetus late last year when Anglo American scooped up seven per cent of Billiton in a surprise asset swap with South African financial services firm FirstRand. The move was seen as a pre-emptive one intended to give Anglo some additional leverage.
“De Beers will always be there for Anglo but Billiton will soon be gone,” said one analyst, summing up Anglo American’s dilemma over the proposed BHP-Billiton merger. Nevertheless, most observers suggest Anglo will push ahead with the complex arrangements to increase its stake in De Beers and not interrupt the friendly BHP-Billiton merger with a rival bid.
Anglo said early this year, when it acquired its stake in Billiton, it would not take that shareholding above 15% or make a hostile bid before 2002. But Anglo is released from that undertaking by the proposed BHP merger.
The BHP-Billiton talks have been going on for some time and analysts suggest the deal whereby Anglo swapped shares in FirstRand for stakes in Billiton and Gold Fields might have provided the catalyst to get merger terms agreed more quickly than they might otherwise have been.
There are so many investment banks linked in some way to the various deals working for Anglo or De Beers or BHP or Billiton that mining analysts at these banks are naturally reluctant to go on record with comments. But they point out privately that only last week at the presentation of Anglo’s financial results CEO Tony Trahar was pressed to say what he saw as a “comfortable” level of gearing for the group a point raised because Anglo’s gearing had jumped to 16,5% from zero in the financial year.
Trahar said he would not like to see gearing go above 20% to 25% but insisted that would give Anglo enough room for manoeuvre for making further acquisitions. Anglo would have to go well above that level if it stretched to make a rival bid for Billiton.
Analysts suggest Trahar has not yet finished work on his overall strategy for the “new Anglo” but the group is more likely to make a bigger push into Australia with a bid for WMC, a smaller mouthful than Billiton, a company that looks a bargain because of the weakness of the Australian currency and one that would offer a major foothold in the global nickel business.
The BHP merger with Billiton was warmly received in the Aussie market. The Australian government was also relieved that the head office of the merged colossus would be in Melbourne, prompting Prime Minister John Howard to describe the marriage as “marvellous”.
Aussie analysts did not go quite that far. But they were not all that far behind. What concerns there were with the merger were related to the potential for Anglo American to play a spoiling role and the issue of whether BHP was paying too big a premium to cement the deal. The merger implies an 18% premium (based on March 16 closing prices and the equivalent value applied to Billiton shares of 0,4842 a BHP share).
One thing for certain was that the premium was much steeper than the “slight premium” referred to by BHP in its discussions on who was getting the better of whom in the merger.
Still, analyst comments on the deal were on the whole positive. Ray Chantry at EL & C Baillieu was in no doubt, saying a successful merger would lead to a 20% increase in the market valuation of the combined group in the medium term. “Some people will argue that BHP is giving too much of the farm away but a deal, as tabled, is a once-in-a-generation and it does appear that the final product will be of a world quality,” Chantry said.