Anglo American rejects BHP’s ‘undervalued’ US$39B bid

Anglo American (LSE: AAL) has rejected a US$39 billion takeover proposal from BHP (LSE: BHP; NYSE: BHP; ASX: BHP) that requires Anglo to divest its platinum and iron ore businesses in South Africa.

BHP’s unsolicited offer “significantly undervalued” the 107-year-old mining company and would be “highly unattractive” to its shareholders, Anglo said on Friday in a response widely expected by analysts. 

“The BHP proposal is opportunistic and fails to value Anglo American’s prospects,” Anglo chairman Stuart Chambers said in the release.

The bid contemplated a structure Anglo’s board says is “highly unattractive for Anglo American’s shareholders, given the uncertainty and complexity inherent in the proposal, and significant execution risks.”

BHP’s proposal is valued at £25.08 per Anglo share, a 14% premium to the target company’s closing price on Wednesday. Under takeover rules, BHP is required to either make a solid offer for Anglo American by May 22 or walk away.

The rejection wasn’t a surprise, BMO Capital Markets said in a note on Friday. 

“Although it is already a slightly accretive deal for Anglo shareholders, there would appear to be room for an increase,” mining analyst Alexander Pearce said in a note. “It’s not a straightforward deal, though, and the complications do make things more uncertain. Now the onus is on management to show shareholders it can drive increased value.”

BMO estimates an offer price to a maximum of about £28 per share, which would be around a 25% increase to its current bid for the retained assets, or 12% higher for the total. This is dilutive for BHP on a price to net present value basis but accretive on an enterprise value to earnings before interest, taxes, debt and amortization basis, so it’s not guaranteed, Pearce said. 

A merger would give BHP about 10% of global copper production. It would also boost its presence in the world’s top copper producing countries, Chile and Peru, by accessing four of the world’s largest copper mines — Collahuasi (with ownership of 44%), Los Bronces (50.1%), El Soldado (50.1%) and Quellaveco (60%). This would improve the company’s exposure to the metal, a key actor in the world’s ongoing energy transition, by about 40%. 

Hedge fund

Amid the buzz triggered by the potential tie-up, Florida-based Elliott Investment Management quietly built a nearly $1 billion holding in Anglo American. The move, reported first by Bloomberg, adds to the challenges facing Anglo following its refusal of BHP’s approach.

The activist hedge fund, headed by Paul Singer, has been acquiring shares over the past few months, according to sources familiar with the matter cited by Bloomberg. The size of the stake would place Elliott as one of Anglo’s top 10 shareholders.

The investor isn’t stranger to mining. In 2017, it acquired a large stake in BHP and pressured the company to divest certain oil assets. By 2021, the world’s largest miner had made agreements to further reduce its involvement in fossil fuels, such as selling its oil and gas operations to Woodside Petroleum Ltd.

Both Elliott and Anglo American declined to provide comments on the matter.

Copper quest

Anglo American has been a takeover target in recent years after output fell and costs mounted. Potential suitors have been discouraged along the way by Anglo’s complex business structure and mix of commodities, including platinum and diamonds.

Anglo’s Chamber noted copper is 30% of the company’s total production.

“With the benefit of well-sequenced and value-accretive growth options in copper and other structurally attractive products, the board believes that Anglo American’s shareholders stand to benefit from what we expect to be significant value appreciation as the full impact of those trends materializes,” the chairman said. 

A price of at least £28 per share would be necessary for serious discussions to take place, New York-based investment bank Jefferies said on Thursday. 

“If we include our estimate of synergies on an after-tax present value basis, we estimate Anglo fair value to be 2824p per share, which equates to a $42.6 billion equity value,” mining analyst Christopher LaFemina said in a note. “That is 28% above the most recent Anglo share price, and we believe it is a reasonable starting point.”

Edinburgh-based consultant Wood Mackenzie said Anglo’s shareholders would likely prefer a price closer to the company’s share price before operational issues emerged last year. 

“Other suitors may be compelled to act at this price,” metals and mining research director James Whiteside said in a note.