BHP one step closer to Anglo merger

Shareholders in BHP say they see the world’s largest miner moving one step closer to a $49 billion (R892 billion) takeover after Anglo American rejected a third approach but agreed to talks and granted its suitor an extra week to commit to a binding bid.

As a deadline approached on Wednesday, BHP again sweetened its all-share proposal — but stopped short of altering a structure that would oblige the target to spin off its South African iron ore and platinum businesses before the remainder is bought up.

“Anglo is now showing signs of capitulation with the extension,” said Prasad Patkar, head of qualitative investments at Platypus Asset Management in Sydney, which owns BHP stock.

“At a price, Anglo is a seller, and at any price, BHP is a buyer. So I think that deal will get done.”Play Video

The two sides are now closer to each other in their view on the valuation, according to people familiar with the matter.

But the complexity of BHP’s plan remains a key sticking point in a blockbuster deal to create the world’s biggest copper miner, investors pointed out.

“I would argue with the one-week extension, there is greater likelihood of a deal getting across the line, as Anglo’s board are finally talking,” said Ben Cleary, portfolio manager at Tribeca Investment Partners.

The focus now is on whether BHP’s executives can use the coming week to convince Anglo’s board and its shareholders that they can get the deal to the finish line without excessive regulatory or social turbulence.

That could include making employment or other commitments in South Africa to ease concerns there.

“It’s clear that Anglo must accept BHP’s much-improved offer,” said Tim Elliott, who manages almost $2 billion across Regal Funds Management Pty’s global resources funds, including BHP and Anglo shares.

“Not only do Anglo shareholders now receive a strong premium, but they receive BHP shares that are deeply undervalued and deliver ongoing exposure to many of the highest quality mines in the world, as well as substantial synergies from the combined group.” 

“While there may be a degree of value leakage regarding the listed South African assets, Anglo’s own plan involves similar value leakage through the sale of high quality coking coal mines at what no doubt will be a deep discount to fundamental value based on coal transactions in recent years,” Elliott said.

Market moves still suggest lingering investor scepticism around the latest offer.

At current prices, Wednesday’s informal approach from BHP values Anglo at roughly £30.24 ($38.48) a share, while Anglo’s stock closed on Wednesday at just under £27 in London.

“We do understand the strategic rationale and we think even at the revised price overnight, there’s potentially maybe even a little bit more wiggle room for them to negotiate,” said Dominic Mlcek, portfolio manager at Infinity Asset Management.

“We wouldn’t be displeased with them getting it at or a little bit above the current offer.”

But even if investors believe a deal is now more likely to succeed, that doesn’t necessarily mean they support it. BHP shares in Sydney were down around 3% in afternoon trade at A$44.84.

“We’re not happy about the deal, we’re not happy about the price,” said Pratkar from Platypus Asset Management.

“Even the price is almost a secondary thing – the size of the deal and the complications that are associated with trying to extract value out something as big as this is. History is against these guys.”