Anglo-BHP deal would benefit everyone – analyst

Anglo American

A purchase of Anglo American by BHP Group would benefit shareholders of both companies, with Anglo shareholders receiving a fairer value for their shares than waiting for the commodity cycle to turn, and BHP would gain world-class assets. 

This is feedback from research analyst at Private Clients at Old Mutual Wealth, Sameer Singh, who said it is rare for a mega-deal of this nature to be mutually beneficial. 

Singh’s comments follow Anglo American’s announcement that it had received an unsolicited all-share merger proposal from BHP. 

Anglo’s board rejected the proposed merger, saying the offer undervalues the miner and is unattractive to Anglo American’s shareholders. 

Anglo said the board had considered the proposal with its advisers and concluded that it significantly undervalues Anglo American and its future prospects.

“In addition, the proposal contemplates a structure which the board believes is highly unattractive for Anglo American’s shareholders, given the uncertainty and complexity inherent in the proposal and significant execution risks,” the miner said.

The proposal comprised an all-share offer for Anglo American by BHP, requiring Anglo American to complete two separate demergers of its shareholdings in Anglo American Platinum and Kumba Iron Ore to Anglo American shareholders. 

The all-share offer and required demergers would be inter-conditional. “The board has therefore unanimously rejected the proposal.”

Singh said the unsolicited offer from BHP, which offered a premium of around 16% of Anglo’s current market value, was still 36% below the calculated fair value of Anglo from Old Mutual Wealth.

However, Singh said that this deal may be different from previous mega-deals among miners, with everyone set to benefit if the deal is successfully concluded. 

Old Mutual Wealth currently holds shares in both BHP and Anglo in their local portfolios. “We currently hold the view of this deal as a net positive,” Singh said. 

BHP shareholders would gain access to world-class assets that offer meaningful growth and efficiency opportunities, while Anglo shareholders would receive a fairer value far sooner than it would take for the market to replicate this.

For BHP, the rationale for the deal can be summed up in one statement –  undervalued assets and copper scale, Singh said. 

Anglo offers a large, high margin and high growth potential copper asset base with close geographic proximity to BHP’s Chilean and Peruvian copper assets. 

The deal would see the combined entity being one of, if not the, largest copper producer in the world, with 2.6 million metric tons of production a year, accounting for almost 10% of global production. 

Singh said that relative to the commodity reserves and resources that Anglo offers and the time and money needed to recreate the same portfolio, Anglo American presents a bargain.

As part of the deal specifics, Anglo would be acquired without Anglo American Platinum and Kumba Iron Ore. Each of these South African-based miners would be unbundled to shareholders.

This would leave the Anglo commodity portfolio with copper, steel-making coal, nickel, diamonds, marginal manganese, polyhalite, and iron ore assets in Minas Rio, Brazil.

For Anglo shareholders, the deal comes down to value and the time required to return the share price to the underlying value of the company. 

“Some of their key commodities, namely platinum group metals, diamonds and nickel, are facing challenging market conditions, which have undermined their respective valuations,” Singh explained. 

This has resulted in Anglo American being heavily undervalued, with Singh saying it would take far longer for the market to return the company to its underlying value than if the deal with BHP was pursued. 

Moreover, Anglo has spent the greater part of the last decade right-sizing and optimising their asset base. 

Together with Anglo’s already undervalued portfolio, this deal would de-risk this large acquisition by offering the potential for higher valued unbundlings and divestments down the road.