Predators eye slimmer Anglo?

There were denials all round this week that Anglo American was a potential take­over target. In a high-stakes poker game, that’s what you do: you pretend to fold before the game has really started.

Anglo’s share price exploded in the past two months as rumours of a possible takeover started to circulate. Recently, the shares were trading at R325, a 40% gain in eight weeks.
The JSE Top 40 index, of which Anglo accounts for about 15%, was caught in the updraft, gaining 15% since the middle of June.

The London Observer reported last weekend that Anglo rivals Rio Tinto, Brazilian mining group CVRD and London-based Xstrata—headed by former Eskom and BHP Billiton financial director ‘Big Mick” Davis - were lining up to make a bid for the world’s second-largest mining house. Though Anglo is valued at about $70-billion (R493-billion), any buyer would have to pay a bid premium, pushing the final cost to about $80-billion (R569-billion).

Mining companies are minting money at current commodity prices, and are scrambling to acquire new assets ahead of their rivals. Anglo, on the other hand, has been shedding assets and this has placed it in its rivals’ cross hairs. Anglo will unbundle, and separately list paper subsidiary, Mondi before the end of the year and has already started winding down its interest in Anglogold Ashanti. Tongaat Hulett and Highveld Steel are also slated for demerger.

Coronation Fund Managers analyst Henk Groenewald says Anglo’s restructuring makes it easier to acquire, though none of its rivals have the cash to make a bid. ‘This means any bid would have to be done with paper [shares] and that introduces conplications over valuations. Anglo management will put up a fight, so the easiest option may be for a friendly merger.”

Another option could involve a joint bid by Rio Tinto, CVRD and Xstrata where they share the spoils among themselves. Anglo is unique in having a strong presence in precious metals and diamonds, through its shareholding in Anglogold Ashanti, Anglo Platinum and De Beers. There’s little appetite among foreign mining houses for South Africa’s deep-level gold mines because of the cost of mining and safety issues. But there would be strong interest in Anglo Platinum, one of the gems in the Anglo portfolio. Under pressure from investors, Anglo announced late last year that it would wind down its gold interests and offload its paper, steel and sugar holdings to concentrate on base metals, coal and platinum.

The London Observer reports that investors having been pushing for an outside candidate more amenable to dealmaking to replace current CEO Tony Trahar when he retires next year.

The consequences for the JSE of an Anglo takeover would be huge, depending on how the deal is structured. Sasfin fund manager David Shapiro says there would be little of interest left on the JSE if Anglo departed. ‘The JSE has been losing companies at a steady rate over the years, especially if you consider that the four big London-listed companies—Anglo, BHP Billiton, Richemont and SAB Miller—plus Sasol and Kumba account for nearly half the value of the exchange.

‘We used to have about 40 gold mines listed on the JSE, now there are four, and only two diversified mining houses [Anglo and BHP Billiton].”

Take Anglo out of the picture and the choices for JSE investors are severely diminshed, says Shapiro.

The government is almost certain to want to have a say in the matter, just as the Australian government insisted BHP Billiton retain a domicile in that country after the merger between BHP and Billiton.

Anglo managers are understood to be less than enthusiastic about the possibility of a bid, since their jobs may be on the line. Societe Generale reports that Anglo is more likely to be predator than prey in the feeding frenzy that seems likely to ensue.

The primary reason for the acquisition frenzy is record commodity prices, fuelled by rampant Asian economies. Nickel this week hit a record $33 000 a tonne, a 128% increase since the beginning of the year.

Xstrata has denied it is interested in bidding for Anglo, having just secured Canadian producer Falconbridge in a four-way tussle with Inco, Phelps Dodge, Teck Cominco over the last year. Xstrata paid R121-billion for Falconbridge, a copper and nickel producer. CVRD is bidding nearly R150-billion for another Canadian nickel producer, Inco, in an all-cash offer. The danger for these groups is that if they do not throw their hats in the bid ring, their rivals may walk off with the tastiest morsels. With Falconbridge now in the Xstrata fold, Davis has succeeded in building the group to a $50-billion asset base from $1-billion when he joined five years ago. His appetite for dealmaking is voracious and though Xstrata is half the size of Anglo in terms of market value, Davis, like his colleagues at Rio Tinto and CVRD, may decide this is an opportunity too sweet to miss.

While the recent spate of acquisitions deplete mining house coffers, they could still tap the debt market to pay for further acquisitions, particularly if they put in a joint bid and gear up Anglo’s balance sheet.

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