Australian mining group BHP has launched a R650bn takeover bid for SA’s 107-year-old one-time global giant Anglo American – a company now worth just a quarter of BHP’s value. If successful, the deal would merely be “material” rather than “game-changing” for BHP, which is attracted by its rival’s South American copper mines. A key part of the BHP bid is that Anglo must first unbundle its major South African assets Kumba Iron Ore and Anglo Platinum, which the Aussies don’t want any part of. Veteran asset manager Piet Viljoen shares his insights, explaining it’s an opening salvo in what could be a lengthy process. He says the bid illustrates SA’s wealth-destructive political governance, practically reflecting the impact of deteriorating national infrastructure and unfriendly business legislation. He spoke to Alec Hogg of BizNews.
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Highlights from the interview
In a recent interview between Alec Hogg and Piet Viljoen, they discussed BHP Billiton’s bid for Anglo American Corporation, a significant development in South African business.
- Background: BHP Billiton’s bid for Anglo American is a significant event in South African business, reflecting Anglo’s decline from a global giant to a smaller entity compared to BHP.
- Global Competitiveness: Anglo’s diminished size highlights South Africa’s lag in global competitiveness and the challenges faced by its mining industry.
- Asset Divestment: The bid includes preconditions for Anglo to divest certain assets, reflecting BHP’s strategic focus and potential challenges in managing South African assets.
- Copper Assets: BHP’s interest in Anglo’s copper assets, particularly in South America, underscores the importance of copper in future industries like electrification.
- Diamond Industry: Discussion on the diamond industry, Botswana’s role, and potential complexities in the bid related to De Beers and diamond assets within Anglo American.
- Government Influence: Consideration of government influence on the bid, potential political factors, and the overall market outlook regarding the bid’s success and implications.
- Investor Perspective: A cautious outlook on Anglo’s performance, highlighting BHP’s strategic value in the market and considerations for investors interested in this mega-deal.
Extended transcript of the interview ___STEADY_PAYWALL___
Alec Hogg [00:00:03] Well, big news out last night is that BHP Billiton, the company well known in South Africa because of the merger that created it with the old Gencor, which became Billiton. It’s making a bid for the 107 year-old Anglo American Corporation, once the giant of South African business. We’re going to talk to Piet Viljoen from Merchant West to get insight into whether the bid is going to go ahead. In other words, if it will be successful and indeed, why now? It’s good to be talking with you. Fresh from BNC#6 only a month ago. And yet, here we are. You know, we’re looking at a perhaps a transformative transaction for South African companies. But interesting to see the reports that are coming from overseas to say for BHP, not really transformative. It’s only about a quarter of the size of what BHP is now. What a difference from the past.
Piet Viljoen [00:01:06] Exactly. I think it just goes to show how far South Africa has fallen behind its global counterparts. The Anglo American, which is once a jewel in the crown of the global mining industry, is actually now just a quarter of the size of BHP, which has a while ago, I mean, going back 20 years ago. The merger of BHP Billiton, as you pointed out, created this business. And those South African assets were the core of that business called BHP Billiton. But those assets have been jettisoned and closed down long time ago. And I think the same might happen to Anglo South African assets now.
Alec Hogg [00:01:42] It is quite extraordinary when you hear from a global company that wants to buy another, or one of its rivals, that one of the pre-conditions will be you’ve got to get rid of certain parts of your business which are in that country. Given that, they did this once before with South32. Maybe you could explain that history.
Piet Viljoen [00:02:03] So, South32, if I recall, was, unbundled out of the Billiton portion that went into BHP, and that was a South African mining assets, chrome and other type of assets. Can’t recall exactly what they owned or still own, but the South African portion of that, was unbundled out of the BHP Billiton. And I think BHP in these talks are asking Anglo to do a similar kind of thing. Unbundling, the bulk of their assets being Kumba and Amplats, before the transaction’s proceeds.
Alec Hogg [00:02:36] But going back a few decades, even three decades ago, Anglo American was the giant in South Africa, it owned so much of not only the mineral resources but of the industrial side as well. What’s happened here, Piet? Just for people who’ve been maybe, gone to Mars for 30 years and came back, and how would you explain it to them?
Piet Viljoen [00:02:57] Look. Very simply, during the sanctions era, large corporates accumulated big, sprawling empires of assets in South Africa because, foreign owners were forced to sell them. So a company like Anglo American, which is a mining business, also had a subsidiary called AMEC, which was an industrial investment holding company, and in there they owned all sorts of industrial assets as well, and financial assets. Remember they also owned First National Bank in those days. They bought Barclays from Barclays and you know, First National Bank. So, Anglo-American had a sprawling empire in South Africa and when the economy up and upped again in 1994, over time they had sold or unbundled all their non-mining interests. So they had becomes smaller, and rationally so. Because you don’t want a business that is a miner and a bank and owns industrial assets like Mondi and those sort of thing. So it’s become much more focussed on mining. And but then what’s happened since then is because of the inept government in South Africa and the poor management of the infrastructure, South African mining assets values have fallen far behind their national counterparts.
Alec Hogg [00:04:07] And the Australians, at BHP in Melbourne say they want none of it. They’ll do the deal. They’d like to do the deal, but they actually don’t want to have anything to do with South Africa, which is sending a bit of a signal.
Piet Viljoen [00:04:20] I think it’s sending a strong signal. But this these signals have been sent by corporates for years and years and years now where, you know, I can understand a foreign entity doesn’t want to invest in a country where they have to give up 30% of the economic proceeds to a BEE partner, for nothing in return or very little return. So, it makes it very tough to do business in South Africa for anyone. And it makes us very uncompetitive. So it’s quite understandable that they want nothing to do these assets. On top of that, if you look at Kumba, it’s a good business. But it cannot deliver its product to global markets because of the infrastructure collapse. So, you know, who would want to own that?
Alec Hogg [00:04:58] Why is BHP making this bid for Anglo American in the first place, if it comes with so many complications?
Piet Viljoen [00:05:05] Well, I, I don’t think it’s that complicated. [00:05:07]Anglo American has a couple of core assets of which copper, South American copper assets are one. And that is a very attractive, as they call it, in the markets future facing metal, copper. You know, if you want to electrify everything, then you need copper. Batteries, need copper for a transmission infrastructure and all those sort of things. So copper is a very important future-facing metal. And Anglo’s has very good copper assets in South America. So those are very attractive, to BHP [31.6s] and so I think there are some attractive assets, and I think it would make sense. I mean, I think if you put those two, if you put BHP’s copper assets together with Anglo’s copper assets, they would control 10% of global copper output, which I think puts them in a very strong position.
Alec Hogg [00:05:56] Chinese won’t like that though. Given their reliance on copper imports.
Piet Viljoen [00:06:01] I guess, I guess so. But, you know, I think you have to build your business, the best way you can. I think from BHP’s point of view, this makes a lot of sense.
Alec Hogg [00:06:11] Is there anything the South African government could do to block it?
Piet Viljoen [00:06:15] I’m not sure. I think Anglo- American’s incorporated in the UK, I’m not sure it is, the Anglo American PRC is subject to South African, law. But politics does have influence. But I think the politicians, here, short-sightedly, would probably welcome the unbundling of things like Kumba and Amplats, because they’ve become more South African. I think that would be the politicians’ view. They would sort of welcome that. But I think it’s very short sighted. But then politicians are known for their long-term views.
Alec Hogg [00:06:46] So not really politically sensitive, even though we’ve got an election coming up, you would have thought, just on the sidelines, let the election go. It’s only a month’s time and then maybe launch your bid. So I’m just wondering about the timing, if there’s any relevance there?
Piet Viljoen [00:07:01] You know, [00:07:01]I think the timing probably is not as much to do with the South African elections, which in a global business like BHP, which is, the business itself is probably multiple times the size of the South African economy. I don’t think South African elections are that important to them. I think what’s more important is the downdraught in the share prices, something like Anglo’s over the past year or so, and taking advantage of that to make, opportunistic bid to acquire control of some attractive assets. [28.8s]
Alec Hogg [00:07:31] So if I understand correctly, Anglo-American share prices, well, it’s massively underperformed BHP. Bloomberg when they ran the story which we’ve got on BizNews this morning, it shows that in the last 2 years it’s underperformed by 45%. So Anglo’s share prices underperformed, perhaps influenced by its big focus on South Africa or significant focus on South Africa and now BHP’s opportunistically going in there and saying, well, we’ll buy those good assets and leave the South African ones behind.
Piet Viljoen [00:08:06] Yeah, I think that’s exactly what’s happening. It is sometimes just as simple as that. Anglo’s has underperformed because it has big exposure to underperforming South African assets. And you have to say that, you know, what is a light in the tunnel for Kumba? I mean, they just can’t get the iron ore to the ports because of the collapse of the government controlled infrastructure. Plus then you have the government rules which say you have to have a BEE partner which owns 30% of your venture, for nothing in return. And same goes for Amplats. And then you have to think that maybe they’re questioning long term viability of the platinum ministry, per say. So, there’s those question marks. So it makes sense to unbundle those. And the jewel in the crown for them would be the cooper assets.
Alec Hogg [00:08:51] What is interesting is they have not made the same requirement or expressed it on diamonds. But De Beers, which is the original founding block of Anglo American, going all the way back to Cecil John Rhodes. What’s the, can we read anything into that? Do you think they want to move into the diamond industry?
Piet Viljoen [00:09:12] Look, I think the diamond industry has a long term future as opposed to the question marks around the platinum industry. I don’t know, platinum might or might not have a long term industry, but I’m fairly certain that diamonds does have a long term future. And it is an attractive market. It goes through cycles. It’s gone through a down cycle at the moment, which, incidentally, is probably a good time to get exposure to it. And I also don’t know what sort of shareholder agreements there are between Anglos and De Beers. Maybe there are certain causes in that agreement which would trigger, certain events in the case of the takeover, which might stop them from unbundling it or separating us from the rump of the other assets. So I don’t know what’s in there. One can only speculate as to that. But as for the diamond industry, I think it has a long term future and is going through a downturn at the moment, which is a good time to get exposed.
Alec Hogg [00:10:02] It is interesting as well that the diamond business is very exposed to Botswana, which doesn’t seem to bother the Australians at BHP too much.
Piet Viljoen [00:10:11] Yeah, and Botswana just last year, I think, renegotiated an agreement with De Beers to allocate a larger percentage of the revenue share to the government. So even there they had to give up a revenue share. Yeah. So Botswana’s important, South Africa is important. And Marine is also important in the case of De Beers. So and then that’s up and down the coast of Africa. But the important thing is I don’t think diamonds are that reliant on government-run infrastructure, which I think makes it a bit different to some other assets.
Alec Hogg [00:10:45] Okay, Pete, you’ve seen a lot of these kind of bids and deals. It’s mega in a South African context, talking about the current share price of Anglo American, has gone up to £33 billion from the bid at around £27 billion. Just explain that, because clearly shareholders are telling us that they think they will either be a counter-bid or BHP will raise its offer because they’re not going to be buying shares at £33 billion, if the company is only going to be sold for 27.
Piet Viljoen [00:11:18] Yeah. So so I think the market is speculating, as to a counter offer. Again, the copper assets that Anglo earns are attractive. BHP can afford a premium because there are some cost synergies between the two businesses that can be taken out, would be accrued to the new owner, BHP. But I think the CO of BHP is also on record as saying they will not overpay for acquisitions. They have made 1 or 2 highly priced acquisitions in the past few years. And they know they’ve done that. They know they misallocated capital in that regard, it wasn’t too big in their life, but it was still a misallocation of capital. And I think they’re not going to do the same thing here. They’re not going to overpay, generously overpay. So if there is a bidding war, I expect it to be quite a muted bidding. Not a big risk.
Alec Hogg [00:12:08] And those assets, weren’t they largely put together by Cynthia Carroll, who was the CEO of Anglo-American and got fired for doing just that.
Piet Viljoen [00:12:17] Well, I’m not sure. I think, and now I might be mistaken, here. But, I’m not sure any of the current assets on Anglo’s were originated during Cynthia Carroll’s time. I think what she was doing mainly was buying back Anglo-American shares at very, very high prices on top of the quadricycle in, 2007, 2008. That was her big capital allocation buyback shares at extremely high prices, which destroyed tremendous shareholder value, and using debt. Thinking back now, however, I do think maybe their iron ore, South American iron ore operations was started during her tenure, so that, there is that portion. But Anglo’s is what it is and what it has been for a long time.
Alec Hogg [00:13:03] In other words, not a great performer, it seems to have been. It feels to me a little bit like, the Shoprite, Pick n Pay story, where Pick n Pay was the market leader, Anglo being the market leader. And yet here BHP Billiton is 4 times the size of Anglo today, even after selling off its oil and gas operations some time ago. So.
Piet Viljoen [00:13:27] It’s kind of selling off its South African assets. You know, so it’s reduced a lot of what it had when it was BHP Billiton and it’s still four times the size of Anglo’s. So it just shows you the extent at which it underperforms, which is not all Anglo’ management’s fault. I mean, they did make some capital allocation mistakes. But the problem is the bulk of the assets operate in the economy, which is mid-current, which allows no scope for growth.
Alec Hogg [00:13:52] So there’s a big signal there. Talking to shareholders, you could imagine some people on the sidelines saying, I want a little bit of this action. Is it smart to buy Anglo shares today on the prospect of it being bought out?
Piet Viljoen [00:14:05] I think if you buy at today’s price, I think the buy-out, the bid is basically in the price today. So I’m not sure there’s a lot of upside from here, unless a vigorous bidding war commences. I don’t know if that will happen or not. I think the odds are less than 50%. I think the asset to own is still BHP, which is what we own in the Merchant West Value Fund. It’s a well-run business, generates significant cash. And, I think it will be a better business after this acquisition.
Alec Hogg [00:14:32] That’s interesting. When you had a look at the two of them and it is a value fund. In other words, you’re looking at, what gives you the best, well, you’re paying the less price possible in every dollar for a company. Why did you go with BHP rather than Anglo American, given that people have been talking about Anglo being bought out for a while?
Piet Viljoen [00:14:53] So I think over the past 18 months we have, moved the Merchant West Investment Value Fund more towards the quality side of the spectrum. But not moving away from value. Remember what is value? Value is the present value of future cash flows. And the value investor tries to buy those cash flows for less than the present bank. So to the extent that we can forecast BHP Billiton’s future cash flows, which I’m not sure we very good at but we can sort of get a handle on that forecast. We think the market has been and continues to underprice BHP Billiton relative to their future assets.
Alec Hogg [00:15:30] So the stock to buy if you do want to, pay or have an interest in this mega-takeover would be BHP rather than Anglo. And what are the chances of this going through. Just, obviously you don’t know. There’s a lot of water that still has to flow under this bridge.
Piet Viljoen [00:15:50] This just the initial sort of skirmish in a big battle which could turn into a big war over time. So it’s hard to say what the timing is going to be, but I think it will, it can take a while. But I think, just sitting in the BHP share is a good place to be.
Alec Hogg [00:16:08] Piet Viljoen is the chairman of RECM. And he manages funds at Merchant West Investments. And I’m Alec Hogg from BizNews.com.
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