Breaking Up Anglo American Now Could Mean Merging It Later
Anglo American’s plan to sell off assets and strengthen its balance sheet would likely make it an even more attractive acquisition
Mining is about splitting things apart to isolate the valuable bits. So is a big part of mining giant BHP’s BHP 2.45%increase; green up pointing triangle proposed takeover of Anglo American AAL -3.49%decrease; red down pointing triangle.
On Tuesday, Anglo outlined its plan to remain a stand-alone business, having rejected a second potential offer valued at roughly $43 billion from BHP on Monday. Anglo wants to keep the copper mines that its Australian suitor covets, its cash-generative iron-ore operations and its British nutrient-mining startup, which is probably too speculative to sell at a sensible price. Everything else is on the block: De Beers diamonds, platinum, steelmaking coal and nickel.
The new strategy, which has been in the works for months, isn’t all that different from what BHP proposed. The Australian miner wants Anglo to demerge its South African iron-ore business Kumba, which is listed in Johannesburg, whereas Anglo would keep it. Conversely, BHP would keep Anglo’s steelmaking coal to combine with its own, alongside the merger of the two companies’ copper and other iron-ore assets. But both plans would break up the old Anglo conglomerate.
This outcome is a clear win for investors. The company has long traded at a discount to other big mining companies because of its conglomerate structure, with a confusion of different commodities, two listed companies and even a luxury brand in De Beers all under one roof. Over the 10 years before BHP’s takeover approach, Anglo’s enterprise value as a multiple of earnings before interest, taxes, depreciation and amortization was on average 21% lower than those of BHP, Rio Tinto and Glencore.
With Anglo’s shares up 25% since BHP’s initial proposal, that discount has turned into a 5% premium. But the stock might not fall much even if BHP backs away, given the alternative of a breakup. In a note published Monday, brokerage RBC estimated that the sum of Anglo’s parts could be worth $48.6 billion if the conglomerate carried out BHP’s divestment plan on its own—13% more than BHP’s latest bid proposal.
Crucially, a breakup would also free up Anglo’s debt-heavy balance sheet for much-needed investment to boost copper output. At a Bank of America conference in Miami on Tuesday, BHP Chief Executive Mike Henry made much of his company’s superior financial strength. But if Anglo sells assets to pay down debt, this is no killer argument for a deal.
So what additional value would merging with BHP bring to the table? The question hinges on the synergies available through combining mining operations—the cost savings possible through combined marketing, joint procurement and so forth. With its deal still at the informal “proposal” stage under Britain’s arcane takeover rules, BHP hasn’t publicly quantified these.
Whether BHP goes hostile with an improved, formal offer before a deadline of May 22 imposed by the U.K. takeover code will likely depend on its estimate of these synergies, set against the risks that its deal gets bogged down in antitrust probes and the politics of South Africa, where Anglo was founded 107 years ago and remains deeply embedded. This is also what investors should focus on if they are presented with a clear choice next week.
BHP might conclude that it is worth biding its time. Anglo’s own breakup plan will throw up assets to buy, such as the steelmaking coal business the South African company no longer wants but BHP would keep. And a slimmer Anglo, which would emerge toward the end of next year under the company’s own strategy, would also make an easier target for BHP to take another swing at. Even if it loses this battle, BHP needn’t give up on the war.