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Anglo American clears more clutter
John Parker’s appointment as chairman of Anglo American seems to be having the desired catalytic effect – even though the British businessman is barely through the door.
Last month, the mining group disposed of its stake in Africa’s largest aluminium processor, Hulamin for a total of $150 million.
Now it is selling its stake in South African agri-processing group Tongaat-Hulett which could net it around $550 million.
This clears out most of the remnants from Anglo’s past as a diversified industrial holding company. Selling these bits and pieces has been a stated strategic objective for some time – so long as the price was right.
Xstrata waiting plays into Anglo’s hands
Mick Davis is sticking to his guns over his proposal for a nil-premium merger between Xstrata and Anglo American. And well he might. The gap between the two mega-miners in terms of market capitalisation is tantalisingly close to zero.
But Davis should not think that this means a prolonged bear hug is going to persuade them to accept the miner’s proposal.
Davis approached Anglo when the market caps of the two companies had almost converged, following a rise in Xstrata’s share price and a fall in Anglo’s. Following the offer, the gap widened in anticipation of a premium from Xstrata or a white knight bid from another mining group. So far neither has materialised and the gap has closed again.
Now Anglo and Xstrata have both reported first-half earnings, Anglo, valued at 25.6 billion pounds ($43.4 billion), is trading at a premium of roughly 5 percent to its antagonist.
Xstrata thinks its offer to split the $1 billion of merger savings it believes it can extract down the middle is fair because (whisper it softly) Anglo is poorly managed. Of course Davis can’t say this openly because the deal is “friendly” but the focus on efficiencies and savings is designed to make the argument for him. Meanwhile, Anglo’s riposte is to stress its own cost-cutting prowess.
It told investors that it expected to be ahead of schedule on its plan to extract $2 billion of stand-alone savings by 2011. Efficient, see?
Moreover, Anglo is arguing that Xstrata has timed its pounce at a moment when two important subsidiaries — Anglo Platinum and De Beers — are cyclically depressed. These two entities are collectively worth an estimated $15 billion, more than a quarter of Anglo’s $58 billion enterprise value. Xstrata’s focus on coal — where sales have surged because of Chinese demand — has conversely helped inflate its value.
Davis recognises the pivotal role that Anglo’s newly-appointed chairman John Parker will have in deciding how this battle plays out, pointing out that Parker needs time to look at the business he is inheriting before making any move.
Anglo’s shareholders may not be pushing Parker to invite Davis into immediate talks, but they will want to know how easy it will be to fix these assets, whether their value can be pushed up substantially, and whether the group has the management to deliver this.
If Parker can’t come up with a convincing answer, that may again raise questions about Anglo’s future as a standalone business. At that point, Davis may have another bite at the cherry.
It is significant that Parker hasn’t forced Davis to “put up or shut up” in UK bid parlance and either make a bid or push off for six months. Perhaps he sees value in having Xstrata as an option to get Anglo’s chief executive Cynthia Carroll working her socks off to turn Anglo round.
Anglo dresses interims up as a defence
Anglo American hasn’t yet received a formal bid from Xstrata. But the miner’s interim results read very much like a defence document.
The highlights alone give a pretty good idea of what chief executive Cynthia Carroll and new chairman John Parker will focus on if Xstrata does eventually pounce.
Anglo’s case hinges on four things.
First, that its plan to cut $2 billion of costs by 2011 is ahead of target. Second, that it is getting on top of its $11 billion net debt, and third, that progress is being made in restructuring its problem child Anglo Platinum <AMSJ.J>. Lastly, Anglo acknowledges that it is an objective to reinstate the dividend.
Added to these elements, lest they appeared to have too defensive a flavour, is the promise of growth, largely through its Minas-Rio iron ore project in Brazil and its Los Bronces copper development.
Of these, cost savings are a crucial point of contention in the Xstrata debate, with the rival miner’s chief executive Mick Davis confident he can squeeze a further $1 billion out of a combination with Anglo, taking the total to $3 billion.
Anglo isn’t making any promises beyond those already given but the tone of the language — which includes talk of being ahead on “asset optimisation”, procurement and job reductions — hints that it may be able to find more savings on its own, without handing anything to Xstrata.
So far the market seems largely happy to let Carroll stick to her plan — highlighting Anglo’s leading position in platinum, diamonds and iron ore alongside its cost cutting success. But investors might ask more searching questions in the event that Xstrata did come back offering a premium.
A White Knight rides to Anglo’s rescue
There may be faint disappointment in Pretoria at the appointment of another white man to chair Anglo American, South Africa’s flagship business, but the blow is much worse in Zug, the head office of Xstrata, the miner that wants to merge with Anglo. Xstrata had sensed weakness at Anglo, and as stories undermining Cynthia Carroll, Anglo’s chief executive, started circulating, her opposite number, Mick Davis, saw his chance. As the Anglo share price wilted following its unwelcome decision to scrap the dividend, he proposed what he disingenuously called a “merger of equals”. The market values may have been equal at that moment, but they are not now, with Anglo valued at 20 billion pounds against Xstrata’s 17 billion pounds. The news that John Parker is to join the board and become chairman next month will reassure Anglo’s shareholders that the company is serious about addressing their concerns about how the business is being run. Parker is a Northern Irishman of great charm whose easy-going manner conceals an ability to encapsulate and get to the kernel of complicated arguments. His arrival changes the dynamics of the international mining business, and makes it much more likely that Anglo will take an active, rather than passive, role in the consolidation that the market appears to be demanding. The appointment probably puts Anglo beyond Davis’ reach, although he should not be underestimated. Michael Rawlinson at brokers Liberium has already remarked on the parallels with BHP Billiton: “BHP shareholders initially resented the terms of the merger, but eight years on it is clear that the cultural renewal…has created a stand out industry leader.” Davis could also promise the South Africans further local involvement, arguing that its record over black empowerment is better than Anglo’s. Yet even that might not be enough, now that a white knight is riding in to take charge at Castle Anglo.
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The Wall
