BHP (ASX:BHP) has seen initial signs of positive engagement regarding its proposed £38.6bn takeover of Anglo American. The two companies have agreed to extend talks by a week, aiming to finalize what could be the mining sector’s largest-ever deal.
Despite Anglo rejecting BHP’s third and purportedly final offer of £31.11 per share, an increase from the initial £25 per share, hopes for an agreement remain. However, the proposal still includes the controversial demand that Anglo demerge its South African platinum and iron ore units.
The absence of Anglo’s previous claim that BHP’s offer “significantly undervalued” it is noteworthy. Analysts had suggested a £30-£35 per share range might bring Anglo to the table, a level BHP has now reached. Nonetheless, Anglo cited “serious concerns” over the risks to its shareholders from the required spin-offs under the proposed deal.
BHP and Anglo are primarily debating the deal’s structure. Anglo considers BHP’s demand for it to demerge units before acquisition as unprecedented and underestimates the costs, time, and risks involved. Anglo argues that BHP should either adjust the structure or offer a higher price to account for these complexities.
Anglo has proposed its own restructuring plan, aiming to streamline into three divisions: copper, iron ore, and fertilizer. This plan includes shedding assets like platinum, coal, nickel, and the De Beers diamond brand through sales and spin-offs.
A change of control under the BHP deal could allow South African authorities to impose costly conditions such as black-empowerment requirements and local spending mandates. Previous deals, like Vitol’s acquisition of Engen’s gas stations, took over 400 days to negotiate with authorities, adding 5-10% to costs.
Another contentious point is the valuation of Anglo’s copper mines amid volatile commodity prices. Copper, crucial for electrification, hit an all-time high above $11,000 per tonne before stabilizing around $10,300, boosting shares of copper producers.
Despite calling its offer “final,” BHP included caveats suggesting it could still increase the offer if a rival bidder like Glencore enters or if Anglo’s board recommends a better offer.
Abel Martins-Alexandre of Lloyds Banking Group remarked that in M&A, a “final and best offer is not final.” Anglo wants BHP to assume more risks or increase the offer, possibly by buying the entire company or taking on specific units like Kumba Iron Ore.
BHP, however, reportedly does not plan to improve the offer or change the deal structure. Richard Hatch, an analyst at Berenberg, believes the bid is likely to fail but remains on a knife-edge.
Australian shareholders of BHP are divided on the potential for another improved offer. Some, like Matthew Haupt of Wilson Asset Management, are cautious about a further increase, while others, like Ben Cleary of Tribeca Investment Partners, believe another raise is possible.
For BHP’s CEO Mike Henry, securing this deal is crucial, as suggested by a fund manager with deep industry knowledge. The market reflects increased deal likelihood, with BHP’s shares dropping and Anglo’s holding onto recent gains.
Dominic O’Kane of JPMorgan now sees a “materially higher probability” of a deal, with BHP offering a change-of-control premium for the first time and room to further sweeten the deal. Some Anglo shareholders, like Ninety One, have expressed support for the increased offer.
South Africa’s Public Investment Corporation, Anglo’s second-largest shareholder, has also shown willingness to engage with BHP, demanding a “meaningful revision” of the offer while highlighting associated risks.
Even if BHP and Anglo reach an agreement, the deal may face further challenges. Chris LaFemina of Jefferies suggests potential interlopers like Glencore could emerge, keeping the takeover battle far from settled.
“Watch this space,” he said, emphasizing that the situation is still unfolding