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Share price moves at both companies would make a deal more expensive in the near term

BHP has cooled on returning with another bid for rival miner Anglo American, according to people close to the company, with the rise in Anglo’s share price making a deal too expensive for the Australian group.

London-listed Anglo launched a radical restructuring plan last year, in the midst of BHP’s ultimately unsuccessful £39bn takeover attempt, with plans to dispose of its coal, platinum and diamond businesses that were well received by investors.

Australia-based BHP has been closely monitoring Anglo’s progress but believes that the miner’s shares have become too expensive to justify a fresh bid in the near term, according to three people close to the situation. 

Anglo’s share price has risen 40 per cent over the past 12 months, while BHP’s has fallen 17 per cent in the same period on the back of lower iron ore prices and a weak Chinese real estate market.

“On the face of it, if BHP were bidding what they thought was fair value, it is difficult to see why they would bid more now,” said George Cheveley, fund manager at Ninety One, an investment manager.

Anglo’s ambitious restructuring plan would create a smaller company in terms of revenues but one that is more focused, making 54 per cent of its revenues from copper and the rest from iron ore.

Anglo secured $4.9bn for its coal assets in Australia last year and is nearing a deal for its nickel mines in Brazil, with an announcement expected in the coming weeks. A spinout of its South African platinum business is expected this year, while the initial public offering of the De Beers diamond business could stretch into next year, according to the company.

Anglo’s shares are trading about 3 per cent higher than the value of BHP’s final all-share offer in May last year, according to calculations by Ben Davis, analyst at RBC.

A renewed bid would be more likely after Anglo spins out its platinum business, he said. “It will be a different company after those restructuring changes,” he said. “I feel there is already a bid premium in the shares today.” 

Getting hold of Anglo’s copper assets — particularly its stake in the Collahuasi mine in Chile and the Quellaveco copper mine in Peru — was a key part of the rationale for BHP’s original bid for Anglo.

BHP has said it is focused on investing in its existing copper assets. But that is costly: the company revealed last year that it needed to spend up to $10bn to boost production at the Escondida copper mine in Chile.

The company recently completed the $3bn purchase, together with Lundin Mining, of an undeveloped Argentine copper asset, Filo del Sol.

“There is no transaction that is a ‘must do’ transaction for BHP,” chief executive Mike Henry told the Financial Times in December.

He added that the company only pursues deals when it is for the right commodity, the right long-life assets, and when extra value can be unlocked by BHP’s ownership. “That’s a pretty strict set of tests. There are not that many opportunities that meet all of those criteria,” he said. 

Under chief development officer Catherine Raw, who joined the company last April, BHP recently restructured its mergers and acquisitions team to consolidate certain functions globally, which had previously been split along regional lines.  

Under London takeover rules, BHP is allowed to renew its bid for Anglo, should it wish to do so, following the expiration of a six-month standstill period in late November.

Here comes a plot twist: As Skydance Media and RedBird Capital Partners work to close the Larry Ellison-backed takeover of Paramount Global this spring, a consortium of investors who previously bid on the storied media conglomerate is mounting an eleventh-hour $13.5 billion offer.

Variety has obtained a legal letter that is being sent to Paramount’s board Friday, Jan. 24, from Project Rise Partners that outlines a new bid that is higher than an all-cash offer the consortium made during the go-shop window. The group says its terms are vastly superior to the $8 billion deal from Skydance and RedBird.

The letter, prepared by the law firm Baker & Hostetler, notes that in light of “the market’s negative reaction to the Skydance transaction, PRP is now increasing its offer as follows: The offer for the B shares is $19 per share compared to $15 per share in the Skydance offer — a 75% premium and 27% more than Skydance. The PRP offer for the A shares remains the same as the Skydance offer. PRP will add $2B to the balance sheet. This is an all-cash offer with committed financing from credible investors.”

Those investors have largely remained mysterious outside of Daphna Edwards Ziman, president and co-chairman of film and lifestyle TV network Cinémoi, and Moses Gross, founder and CEO of real estate company ANM Group. (Gross is the CEO of Malka Equities, the umbrella company that signed a $10 billion commitment on behalf of the investors.) But sources say Project Rise Partners is also backed by titans of industry comparable to Larry Ellison and includes at least one of the richest men in the world and as well as a company partner that is a pioneer in the satellite industry. Ziman and Gross fronted the previous offer, which they say was never presented to the board.

Reps for Skydance and Paramount Global declined to comment. A spokesperson for the Paramount board’s special committee established to vet offers did not immediately respond to a request for comment.

A publicly traded corporation is typically legally bound to consider any legitimate offer of value that could benefit shareholders. The Project Rise investors fired off a legal letter in October 2024 claiming that Paramount’s special committee violated its fiduciary duty to shareholders by neglecting to consider the group’s previous $8.5 billion bid for the company. Project Rise Partners’ $13.5 billion offer includes $5 billion for restructuring of the debt.

According to an SEC filing, a member of Paramount’s Special Committee held a call with a Project Rise Partners representative on Aug. 15, which was inside the go-shop window. (That window closed on Aug. 21.) But the SEC filing says the two sides did not discuss terms during the call and that the group’s acquisition proposal was only submitted on Aug. 26, after the window closed.

The Baker & Hostetler letter — addressed to Paramount board members Shari Redstone, Barbara Byrne, Linda Griego, Judith McHale and Susan Schuman — states that the company’s Class B shareholders “would own 50% of the equity versus 30% in the Skydance offer. The PRP offer includes an independent board and normal corporate governance. The board committees Skydance plans to eliminate would be retained. B shareholders would receive a vote for the first time in the company’s history.”

Project Rise Partners additionally claims that it plans to grow Paramount Global’s headcount, whereas the Skydance and RedBird partners have indicated more cuts would come under a Skydance-Paramount merger.

Larry Ellison, also one of the world’s richest men, is facing regulatory hurdles with the Paramount-Skydance merger that would see his son, Skydance CEO David Ellison, running the combined media assets. President Donald Trump’s new FCC chair Brendan Carr has publicly raised concerns about the merger. The elder Ellison, founder of Oracle who has a net worth of more than $200 billion, has been a longtime supporter of Trump’s and has been shoring up his relationship with the president. He traveled to the White House on Tuesday to announce a separate AI Stargate deal that industry observers saw as part of an effort to keep the Paramount-Skydance merger on track. That prompted Elon Musk to mock Ellison on X, writing: “they don’t actually have the money” and have “well under $10B secured.” Separately, Trump has indicated that he would be open to Larry Ellison or Musk buying TikTok.

The Skydance-RedBird $8 billion deal to merge with Paramount has been controversial among shareholders, primarily because it values Skydance at roughly $4 billion. The new Project Rise Partners bid questions that valuation. “Skydance reported $25M in EBITDA in 2023, and Paramount purchased Skydance for $4.75B, or approximately 200x trailing earnings,” the Jan. 24 letter says. “There are no market benchmarks that justify the Skydance valuation, and no independent bidder would pay that price.”

Meanwhile, politicians like Rep. John Moolenaar (R-Mich.), chair of the House China Select Committee, have raised concerns about China’s role in the Skydance deal because Tencent, a company with ties to the Chinese military, will have a small stake in the media giant, whose assets include everything from CBS News to the Paramount film and TV studio.

“The Board and its advisors appeared so eager to conclude a transaction with Skydance, no one appears to have fully accounted for Skydance’s foreign ownership,” the Project Rise Partners letter says. “The Pentagon recently placed Tencent on a list of firms alleged to be helping the Chinese military. Regulators will scrutinize the proposed transaction given the heightened concern over Chinese control of consumer platforms and access to personal data. If the Board and its advisors missed or ignored such a serious red flag, shareholders will naturally question the thoroughness of the Board’s due diligence. By extension, ineffective diligence might explain the unreasonable valuation paid for Skydance, the company acquiring Paramount.”

Paramount and Redstone, whose National Amusements Inc. is the controlling shareholder of Paramount, have a binding deal with Skydance Media and may only be able to back out if regulators stop the merger. A source familiar with the process says that is highly unlikely. But the Baker & Hostetler letter claims that the Paramount board eliminated an option to consider superior bids from its sale process.

“In the public company context, most merger agreements include a standard fiduciary out that allows a new bidder with a superior offer to pay the breakup fee to compensate the original bidder for opportunity and other costs,” the letter says. “For unknown reasons, the Board or its legal counsel specifically excluded a fiduciary out which harms B shareholders and benefits Skydance. … Fiduciary outs enable boards to terminate a transaction agreement if a superior offer arrives before the deal is approved by the shareholders and closed. If the agreement omits such an exit clause, the Board’s decision may be deemed ‘preclusive and coercive.’ There is no discernable rationale for that unnecessary, one-way value transfer to Skydance. These ‘deal protection devices’ do not protect shareholders.”

The letter also stresses that Paramount directors have a duty of loyalty to shareholders, not to advisers or Skydance.

“Because of the Board’s decision to eliminate the fiduciary out, the outsized $400M breakup fee benefits Skydance in the case of a regulatory block but does not benefit B shareholders if there is a superior offer. After canvassing the market for over nine months, the Board concluded that Skydance was the only actionable, fully financed offer available,” the letter continues. “Paramount Directors breached their duty of loyalty by crafting a merger agreement favorable to the buyer and not the seller in this transaction.

New rules could tax unrealized gains on bitcoin holdings at large companies

If you think MicroStrategy’s MSTR -1.11%decrease; red down pointing triangle business model is wild, wait until you see its tax issues.

After years of raising money through stock and debt offerings to buy bitcoin, MicroStrategy owns a stash worth about $47 billion, which includes $18 billion of unrealized gains. In an unusual twist, it could have to pay federal income taxes on those paper gains—even if it never sold a single bitcoin. The tax bill could total billions of dollars starting next year, according to a new disclosure this month by MicroStrategy that has received little attention.

Usually investment gains aren’t taxed until the assets are sold. But under the Inflation Reduction Act passed in 2022, Congress created a “corporate alternative minimum tax” in which MicroStrategy now finds itself ensnared. The tax rate would be 15%, based on an adjusted version of the earnings that MicroStrategy reports on its financial statements under generally accepted accounting principles. Its best hope is that the Internal Revenue Service adopts new rules that let MicroStrategy off the hook.

The IRS already has written exemptions into the currently proposed rules so that companies such as Berkshire Hathaway don’t have to pay taxes on unrealized gains from securities such as common stocks. However, the IRS so far hasn’t included any exemptions for companies’ unrealized gains on crypto assets such as bitcoin.

MicroStrategy has been pressing its case with the IRS, and it could be reasonable to expect the government will bend its way, given the Trump administration’s outward affection for the crypto industry. The IRS is still in the process of drafting rules to implement the new corporate alternative minimum tax.

Robert Willens, a longtime tax analyst who has been tracking MicroStrategy’s IRS issues, said he expects the IRS would decide in MicroStrategy’s favor and exclude unrealized gains on cryptocurrencies under its proposed rules, but he noted there is no guarantee it would do so. “If the Biden group was still in place, they probably wouldn’t get the exemption,” he said. He added that “it would be easy to slot crypto assets into the same exemption that stocks are going to enjoy, because there’s no real difference in the accounting.”

Meanwhile, the company is in a bind. With a $92 billion stock-market value, MicroStrategy still trades at a substantial premium to the value of the bitcoins it owns. The mere possibility it could have to pay taxes on the unrealized gains is a further reason the premium makes no sense.

If it did have to pay taxes on unrealized bitcoin gains, the company might have to sell some of its bitcoins to come up with the cash, because the rest of MicroStrategy’s businesses aren’t profitable. Doing that would defeat the purpose of its bitcoin roll-up strategy. It also would make MicroStrategy one of the least tax-efficient ways imaginable for investors to get exposure to bitcoin.

One of the reasons the U.S. enacted the corporate alternative minimum tax was to rein in companies that aggressively recognize earnings for GAAP purposes while at the same time showing little or no taxable income on their IRS returns. Enron, for example, was infamous for posting outsize GAAP earnings during the 1990s while paying no federal income taxes.

In MicroStrategy’s case, the company could end up getting hit with the equivalent of a wealth tax—paying taxes on paper gains that could prove transitory if bitcoin’s value falls.

Before this year, companies that owned crypto assets didn’t report them at fair market values on their GAAP financial statements. The accounting rules instead treated cryptocurrencies as intangible assets that could be written down in value, but not up. Thus, MicroStrategy didn’t include the unrealized gains from its bitcoin holdings in its GAAP earnings.

All of that is changing this year under new rules passed by the Financial Accounting Standards Board, which sets U.S. GAAP. Starting this year, MicroStrategy will show the fair value of its bitcoins on its balance sheet, and the fluctuations in value will be included in earnings.

MicroStrategy in a Jan. 6 filing disclosed numbers for the first time quantifying the impact of the tax and accounting changes. The company said it would add as much as $12.8 billion to its GAAP retained earnings, effective Jan. 1. That figure, which is a component of shareholder equity, would be part of the calculation when determining its financial-statement income for purposes of the corporate alternative minimum tax.

The company also said it would increase its GAAP deferred tax liabilities by as much as $4.0 billion. That figure could be seen as a rough guide for the total tax bill MicroStrategy might face if one assumed that bitcoin’s price stayed where it was at the end of 2024.

The company said it could become subject to the corporate alternative minimum tax starting in 2026. The 15% minimum tax would apply if its average annual financial statement income exceeds $1 billion over a three-year period before the initial tax year.

Here is where individuals who buy bitcoin for their own accounts have an advantage over MicroStrategy: If the bitcoin they buy goes up in value, they won’t have to pay taxes on the gains until they sell it. MicroStrategy would like to be able to say the same for itself. It will need the IRS to agree first.

US private equity group closes in on buyout of partner’s stake in £2bn portfolio

Blackstone is closing in on a deal to take full control of a £2bn portfolio of more than 5,000 UK railway arches, buying out its partner five years after a deal that symbolised the advance of US private equity into the UK economy.

The US private capital group, which is the world’s largest commercial property investor, has agreed to buy TT Group’s half of the portfolio, which the two investors acquired from Network Rail for £1.5bn in 2019, according to people familiar with the matter.

The transaction would involve Blackstone buying out TT’s stake in the Arch Company, which owns the portfolio. The deal, first reported by Green Street News, has yet to be finalised.

The brick arches under railway lines are an iconic part of British streetscapes and home to a range of small businesses from micro breweries to auto repair shops and hairdressers.

Network Rail’s sale of the vast portfolio became symbolic of private equity’s increasing role in the UK domestic economy, making Blackstone and TT the landlord to thousands of small businesses.

The deal brought greater investment to the arches, but also raised concerns about more aggressive management and rent increases.

Some small businesses faced steep rent increases as they were dealing with the hardship of the Covid-19 pandemic.

The Arch Company at the time offered some occupiers rent holidays and set up a hardship fund to assist struggling businesses. It also negotiated a “tenants charter” with the Guardians of the Arches tenants association.

The new owners also invested heavily in the portfolio. Some 1,400 arches were derelict when Network Rail agreed the sale and are now being brought back into use.

TT Group, owned by the Pears family and formerly known as Telereal Trillium, is one of the UK’s largest privately held real estate investors, with a portfolio worth more than £9bn.

The group is looking to free up capital for new investment while Blackstone would prefer to have complete control of the portfolio, said one of the people familiar with the matter.

Blackstone and TT declined to comment.

US stocks at most expensive relative to bonds since dotcom era

Tech-fuelled equity rally throws up red flag on ‘Fed model’ for comparing valuations

US equities have soared to their most expensive level relative to government bonds in a generation, amid growing nervousness among some investors over high valuations of megacap technology companies and other Wall Street stocks.

A record-breaking run for US equities, which hit a fresh high on Wednesday, has pushed the so-called forward earnings yield — expected profits as a percentage of stock prices — on the S&P 500 index down to 3.9 per cent, according to Bloomberg data. A sell-off in Treasuries has driven 10-year bond yields up to 4.65 per cent.

That means the difference between the two, a measure of the so-called equity risk premium, or the extra compensation to an investor for the risk of owning stocks, has fallen into negative territory and reached a level last seen in 2002 during the dotcom boom and bust.

“Investors are effectively saying ‘I want to own these dominant tech companies and I am prepared to do it without much of a risk premium,’” said Ben Inker, co-head of asset allocation at asset manager GMO. “I think that is a crazy attitude.”

Analysts said the US’s steep equity valuations, labelled the “mother of all bubbles”, were the result of fund managers clamouring for exposure to the country’s buoyant economic and corporate profits growth, as well as a belief among many investors that they cannot risk leaving the so-called Magnificent Seven tech stocks out of their portfolios.

“The questions we are getting from clients are, on the one hand, concerns about market concentration and how top heavy the market has become,” Inker said. “But, on the other side, people are asking ‘shouldn’t we just own these just dominant companies because they are going to take over the world?’”

The traditionally constructed equity risk premium is sometimes known as the “Fed model”, because Alan Greenspan appeared to refer to it at times when he was chair of the Federal Reserve.

However, the model has its detractors. A 2003 paper by Cliff Asness, founder of fund firm AQR, criticised the use of Treasury yields as an “irrelevant” nominal benchmark and said the equity risk premium failed as a predictive tool for stock returns.

Some analysts now employ an equity risk premium that compares stocks’ earning yield to inflation-adjusted US bond yields. On this reading, the equity risk premium is also “at its lowest level since the dotcom era”, said Miroslav Aradski, senior analyst at BCA Research, although it is not negative.

The premium could even understate how expensive stocks are, Aradski added, because it implicitly assumes that the earnings yield is a good proxy for the future real total return from equities.

Given that profit margins are above their historic average, if they were to “revert towards their historic norms, earnings growth could end up being very weak”, he said.

Some market watchers look to altogether different measures. Aswath Damodaran, professor of finance at the Stern School of Business at New York University, is sharply critical of the Fed model and said the right way to compute the equity risk premium was to use expectations of cash flows and cash payout ratios.

By his calculations, the equity risk premium has declined over the past 12 months and is close to its lowest level in the past 20 years, but is “definitely not negative”.

Equities’ valuation relative to bonds is just one measure of exuberance cited by managers. Others include US stocks’ price-to-earnings valuation against their own history or compared with stocks in other regions.

“There are quite a few red flags here that should make us a bit cautious,” said Chris Jeffery, head of macro at Legal & General’s asset management division. “The most uncomfortable one is the difference between the way that US equities and non-US equities are priced.”

Many investors argue that high multiples are justified and can be sustained. “It is undeniable that [US stocks’ price-to-earnings] multiple is high relative to history, but that doesn’t necessarily mean that it is higher than it should be, given the underlying environment,” said Goldman Sachs’ senior equity strategist Ben Snider.

On Goldman’s own model, which suggests what the PE ratio for the US blue-chip equity index should be, after taking account of the interest rate environment, labour market health and other factors, the S&P is “in line with our modelled fair value”, Snider said.

“The good news is that earnings are growing and, even with unchanged valuations, earnings growth should drive equity prices higher,” he added.

US stocks have now regained all the ground lost during a fall since December. That sell-off highlighted some investors’ concerns that there was a level of Treasury yields that the stock market rally could not live with, because bonds — a traditional haven asset — would appear so attractive.

Pimco’s chief investment officer said this week that relative valuations between bonds and equities “are about as wide as we’ve seen in a long time”, and the same policies that could take bond yields higher threatened to hit stocks.

For others, US stocks’ declining risk premium is just another reflection of investors piling into Big Tech stocks and the risk that concentration in a small number of big names poses to portfolios.

“Even though the momentum is strong on the Mag 7, this is the year where you want to be diversified on your equity exposure,” said Andrew Pease, chief investment strategist at Russell Investments.