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If Xstrata is to shut up on Anglo it should say so
Only a week to go before decision time and it looks increasingly as though Xstrata boss Mick Davis has already made up his mind and opted to walk away from making a formal bid for mining rival Anglo American.
Reuters correspondent Raji Menon quotes an unnamed top-10 shareholder in Xstrata saying: “They have pretty much indicated to us that they will be walking away”.
This makes sense – nothing has changed since Xstrata got a “put up or shut up” notice from the UK’s Takeover Panel, giving it until October 20 to make a formal offer or walk away for six months.
If Xstrata has indeed made up its mind, it should waste no time in telling investors that it has no plans to make an offer. Why wait?
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.
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.
Diamonds aren’t yet Anglo’s best friend
De Beers’ far from sparkling results show its management is finally tackling costs and over-production, but that won’t stop Anglo American Chief Executive Cynthia Carroll fretting about the diamond group’s debts as she tries to wriggle out of Xstrata’s bear hug.
Anglo’s 45 percent stake makes it the biggest shareholder — with the Oppenheimer diamond dynasty owning 40 percent and Botswana 15 percent — in the world’s largest diamond producer, which borrowed heavily to fund production and now faces a $1.5 billion loan refinancing by next March.
It racked up net debts of $4.06 billion, only to find itself sitting on a glut of diamonds at the height of the credit crisis when sales collapsed catastrophically.
Sales now appear to be picking up — moving back towards their average levels at the diamond auctions, known in the arcane world of diamonds as “Sights”, which take place 10 times a year. By cutting back dramatically on costs and getting a grip on production — which will be down by 50 percent for the year — De Beers is now hoping it can get itself back on track.
It certainly needs to. First-half net profit fell a disastrous 99 percent to just $3 million, with debt costs wiping out profit before finance charges and taxation of $140 million.
While slow off the mark initially, the vigour with which De Beers, under managing director Gareth Penny, has addressed the problems is good news for Carroll who needs to convince her own investors that she is tackling underperformance within her own Anglo empire as she attempts to see off Xstrata’s approach.
For getting things done in the labyrinthine De Beers “family of companies” — a complex matrix involved in controlling everything from mining to sales — is by no means simple. Even though Anglo owns 45 percent of De Beers, the management contract sits with the Oppenheimer family company Central Holdings.
These complexities are no less of a factor in sorting out De Beers’ debt, which has risen from $3.8 billion at the end of 2008. Anglo, along with the other shareholders, has already lent De Beers money — some $368 million in interest free loans in Anglo’s case.
De Beers says it has not yet drawn on a $500 million loan from its shareholders during the first half, but with the $1.5 billion bank loan to refinance by March of next year, it may yet have to. De Beers thinks it will be able to get the refinancing done in time — albeit at a higher cost.
The recovery in the diamond market and its cost cutting should ensure that De Beers gets back on an even keel, but it will still take some time for the company to get anywhere near repaying its debts.
Analysts at RBC Capital Markets reckon De Beers won’t be able to pay a dividend for at least two years, which begs serious questions about the capital Anglo has employed there.
Anglo rejected Xstrata’s nil-premium merger proposal partly because it would dilute its exposure to diamonds, so it needs to show that De Beers really is going to sort the business out and make a decent return on the capital it has tied up there. After all, even if it were to have a change of heart and try to get out of diamonds, now is hardly the best time to be selling.
Carroll’s priority must be to ensure it does a deal with its banks, and fast, otherwise De Beers’ stated purpose of turning “diamond dreams into lasting reality” will come too late for Anglo in the debate with Xstrata.
And if Anglo does need to stump up any more loans or even take part in a rights issue, this must be in exchange for greater control at De Beers.
Friends will find Pac-Man out of fashion
The 1980s revival continues. Music fans have been flocking to see the Human League and Spandau Ballet on their reunion tours. Now M&A aficionados can savour their own mini revival. Yes, it’s the return of the Pac-Man bid.
Two mid-sized British insurers, Friends Provident and Resolution have revived this gambit, named after a mind-bogglingly dull computer game where the objective is to eat your pursuers rather than be eaten yourself. In M&A, this involves the target of a bid approach (in this case, Friends) turning on the bidder and launching an offer itself.
In the case of Resolution there was a certain logic in so doing. Resolution is effectively a cash shell company, which has opaque governance. Its nil premium share for share approach offered little to Friends other than the chance to hand over 10 percent of the combined company’s profits to Resolution’s management. The proposed nil premium counterbid made little sense (other than to eliminate the 10 percent profit share). But it did at least tease out a slightly more generous bid proposal from Resolution.
Pac-Man defences are rare in M&A — and for good reason. They’re wholly unconvincing. If you get a bid for your company, and think that the combination has merit, squabbling over who bids for whom seems to miss the point. At worst it smacks of management self interest.
This is not the only reason there have been very few Pac-Man defences. The bigger problem is that they are uniformly unsuccessful. The target never actually gets to gobble up the predator. It is 10 years since Elf Aquitaine’s desperate attempt to see off an ultimately successful bid by fellow French oil major Total. The same year, British regional brewer Marston’s also used the defence against a bid from Wolverhampton and Dudley Breweries. It too failed.
That doesn’t stop it from rearing its ugly head from time to time. Pac-Man defences were raised as a possibility for Rio Tinto to turn the tables on BHP Billiton and more recently as a means for Anglo American to round on Xstrata. But generally that’s all it is: talk.
The Resolution-Friends situation is an unusual one. Resolution is a cash company that is desperate to do a deal, while Friends rejected a 150 pence per share bid from J.C. Flowers last year. There are particular reasons they have ended up in a sort of death embrace. So while the Spandaus may be back in favour, the Pac-Man bid is likely to remain consigned to the archive.
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.
Anglo’s shareholders – just waiting for more?
The Times says Anglo American shareholders have rejected rival Xstrata’s merger approach.
“All of Anglo’s leading institutional investors are understood to have turned down Xstrata’s nil-premium merger of equals,” the paper says.
from Neil Collins:
Mick to Cyn: that letter in full
An early draft of the letter from Mick Davis of Xstrata to Cynthia Carroll of Anglo American has fallen into my hands. The public interest demands that I publish it.
Strictly private and confidential
Dear Cyn
I've been told by my advisers that I ought to write to you, so here goes. I assume you read the papers. Even if none of your shareholders has actually phoned to tell you the game's up, you'll have read that they don't think you're equipped to run a big mining company.
-
The Wall
