What better way for the group to get things back on track than acquiring Billiton, suggest London analysts
Ken Gooding in London
Some London analysts are telling clients that Anglo American is likely to disturb the friendly merger between Billiton and BHP by aggressively topping the Australian group’s terms. They are suggesting that Anglo cannot afford to let Billiton slip from its grip if it is serious about building a substantial, global base metals business, and because potential takeover targets are fast disappearing.
However, given that any Anglo move would almost certainly be hostile and not have the Billiton board’s blessing, the analysts admit that it would have to pay a hefty premium to the price implied by the BHP terms. Also, it must be said that European institutional investors seem to have warmed to the idea of a Billiton-BHP combination.
Nevertheless, ABN-Amro analysts David Bird and Tim Petterson who are among the most vocal of those suggesting Anglo will move on Billiton say Anglo could afford to pay at least 3,80 a share, about 20% more than BHP is offering. And, if pushed, Anglo has the potential to offer up to 4. While Rio Tinto could also afford to bid this high, Anglo could offer more cash as part of a bid package and investors would find an Anglo-Billiton combine more acceptable than a Rio-Billiton one.
Like other analysts promoting the idea of a possible Anglo bid for Billiton, the ABN-Amro team points out Anglo has a very strong motive for getting involved. Acquisition of Billiton would offer “a unique opportunity to give critical mass to Anglo’s base metals division”, they state in a detailed circular to clients. “We therefore believe there is motivation for a bid and that there is a reasonable chance of a bid from Anglo emerging.” But Anglo will be bound to wait until the BHP-Billiton offer documents are published. The companies hope to send these to shareholders before the end of this month.
Anglo certainly seems determined to get much bigger in base metals. The biggest chunk of the group’s total capital expenditure went on base metals last year $410-million, well ahead of the $272-million spent by the platinum operations in second place. Also, Anglo is preparing to spend another $3-billion on base metals projects that have either been approved or are waiting for approval, half as much again as the $2-billion for the platinum business.
Admittedly, James Campbell, who runs the base metals operations for Anglo, went from hero to zero last year when his part of the business accounted for $237-million of write-offs and made an operating loss of $41-million against a $174-million profit in the previous 12 months.
However, what better way to get things back on track, London analysts suggest, than acquiring Billiton and with it some highly experienced base metals management?
Not everyone here is convinced that Anglo hoped eventually to capture Billiton when it took a 7% stake in exchange for part of its holding in the FirstRand financial services group. Some say disposing of the FirstRand shareholding was Anglo’s prime consideration and the acquisition of a strategic holding in Billiton only a secondary consideration.
One factor pointing to Anglo’s non-intervention in the BHP-Billiton situation is that at Anglo’s annual meeting CEOTony Trahar said he aimed to keep the group’s gearing below 25%. A bid for Billiton would take it well above that level but analysts suggest, given the unique opportunity for grabbing Billiton, Anglo would not mind going above that level for a while.
The remaining major argument against an Anglo-Billiton merger is that Anglo wants to reduce its reliance on South African operations by building up its business elsewhere in the world and acquiring Billiton would make it even more dependent on South Africa.
However, the London analysts suggest that South Africa would account for about the same percentage of total global operations if Anglo acquired Billiton. In other respects, some say, the “fit” between Anglo and Billiton, in terms of commodities and geographic spread, is even better than that between Billiton and BHP. xx@ RAD trading blunder to be probed
Bruce Whitfield
Heads will roll at Real Africa Durolink (RAD), which has been brought down by a R196-million trading loss. But bad news for RAD is good news for PSG Investment Bank, which was able to buy the bank in a hurry.
A full internal investigation is being launched into the trading loss by RAD. Details of precisely what went wrong are being looked into, but CEO Michael Bolton says jobs will be lost because of the blunder. “We had an open trading position, which we had to close. I can’t elaborate on the open trading position, we did come to arrangements with counter parties that allowed us to close the position and we are under confidentialities.”
Speaking on Moneyweb’s Classic Business, Imtiaz Ahmed of Liberty Asset Management says he was shocked by the news.
He says it exposes serious problems with RAD’s systems of checks and balances. “It’s quite alarming that a small bank like RAD can lose R196-million. It’s a sign of poor risk control, poor management controls, and while not all the facts are available, I’m quite certain we’ll find RAD’s capital adequacy ratio is below regulatory requirements.”
RAD was in discussions with PSG regarding a possible merger when details of the trading loss emerged. Bolton says they are fortunate that their negotiations were well under way when the news broke, although he does admit that it significantly weakened their bargaining position.
They had been discussing the possibility of a merger for some time and even though a broad outline of a deal had been reached, Bolton says the news of the loss “put us on the back foot”.
PSG is acquiring RAD in a share transaction worth just more than R325-million. PSGBH will issue 415-million new shares at 78,4c in a deal that means RAD will become a wholly owned PSG subsidiary and will be delisted from the JSE Securities Exchange. PSGBH will have more than R2-billion in shareholder funds and is also sitting on a healthy cash pile.
PSG group chair Jannie Mouton does not rule out further acquisitions. “You have to be a big bank to survive,” he says.
Both Bolton and Mouton insist the takeover is a good deal for both sets of shareholders.
“We’ve been fair. It’s a generous offer,” says Mouton, “I feel sorry for them. That’s why we are doing a quick transaction.” He says “management and senior people” will be invited to join them, but the extent of the potential fall-out of the investigation into the trading loss is unclear at this stage.