Anglo breakup costs complicate a sweeter BHP deal
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
By Karen Kwok and George Hay
LONDON, May 1 (Reuters Breakingviews) -BHP BHP.AX boss Mike Henry is far from done with Anglo American AAL.L. The chief executive of the Australian mining giant is mulling an improved offer for his London-listed rival after it rejected his first proposal last week, a source familiar with the situation told Breakingviews. But the costs associated with getting at the bits of Anglo he covets limit his ability to be generous.
BHP’s initial all-share proposal, which has yet to become a firm offer, valued Anglo’s equity at 31 billion pounds ($39 billion) based on market values on April 23, the day before news of its interest emerged. It’s understandable why Anglo Chief Executive Duncan Wanblad didn’t dig it: a sum-of-the-parts calculation by Breakingviews shows Anglo could be worth $49 billion, similar to the company’s market value barely a year ago. Henry has also made his offer conditional on Anglo spinning off its 80% and 70% respective stakes in listed South African entities Anglo American Platinum (Amplats) AMSJ.J and Kumba Iron Ore KIOJ.J. As of April 23, these were together worth about $13 billion.
BHP can afford to pay more. Assume Anglo’s $11 billion net debt stays with the company left behind after demerging Amplats and Kumba, which includes its prized international copper assets. BHP’s initial proposal implies an enterprise value of $37 billion. Then take the $4.4 billion of operating profit that analysts polled by Visible Alpha expect Anglo’s businesses to generate in 2025, excluding the listed South African assets. Applying a 35% tax rate, BHP would make a return on invested capital of around 8%. That’s less than Anglo’s 9% cost of capital as estimated by Morningstar, but does not include cost savings which Jefferies analysts estimate are worth $4 billion in today’s money.
Now imagine Henry bumps his initial $26 billion offer for Anglo’s unlisted businesses by 10%. Including net debt, that would amount to 5.7 times the $6.9 billion of EBITDA that analysts expect the assets to generate in 2025. That’s in line with the average of BHP and rival Rio Tinto RIO.AX, but cheaper than copper heavyweights like Antofagasta ANTO.L and Freeport-McMoRan FCX.N, which trade at above 7 times.
Yet there’s a catch. Separating the South African assets could land Anglo with a capital gains tax bill of $2 billion, people familiar with the matter told Breakingviews. That would be crystallised when the group hands its shares in Amplats and Kumba to Anglo shareholders, reducing the value of the business BHP wants to buy. And Henry doesn’t have unlimited borrowing power: BHP’s net debt was $13 billion as of December, the upper end of the company’s $5 billion to $15 billion range.
The good news for Henry is that Anglo might incur a similar tax bill if it demerged the South African assets itself. That would increase debt just as it waves goodbye to businesses set to contribute a third of Anglo’s EBITDA next year. Other bidders hoping to emulate BHP’s approach would face similar costs. As such, Henry may not have to be much more generous to get his target’s shareholders on side.
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CONTEXT NEWS
BHP is privately talking to investors about a potential improvement to its initial takeover proposal for Anglo American, Reuters reported on April 27 citing a source familiar with the matter.
The world’s largest listed miner said on April 25 it had proposed an all-share offer which requires its London-listed target to spin out its listed iron ore and platinum assets in South Africa. Including the South African assets, BHP said the offer was worth 31.1 billion pounds, or 25.08 pounds ($31.39) per Anglo share, based on share prices before the announcement.
Anglo American said on April 26 its board had “unanimously rejected” BHP’s proposal.
Anglo American held its annual general meeting on April 30. Under UK takeover rules, BHP has until May 22 to make a formal offer.
Graphic: Anglo American rivals’ valuation multiples https://reut.rs/3Wma7Tv
Editing by Peter Thal Larsen and Oliver Taslic
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