De Beers deal ‘good news’ for Anglo American: analyst

The much-publicized takeover offer for De Beers Consolidated Mines (DBRSY-Q) has prompted mining analyst Roger Chaplin of Canaccord Capital to take a hard look at what the deal would mean for the company, and for the parties involved in DB Investments, the consortium making the bid.

In a research report, the London-based analyst describes the deal as positive for London-listed Anglo American, which holds a 45% stake in BD Investments. Central Holdings, which represents the Oppenheimer family investments, also has a 45% stake. The remainder is held 10% by Debswana, which in turn is a 50-50 joint venture between the government of Botswana and De Beers.

Chaplin issued a “hold” recommendation for De Beers, and a “buy” recommendation for Anglo American.

As for the outcome, if the offer goes through as proposed, each holder of De Beers linked units will receive:

– 0.43 of an Anglo American share, currently worth US$28.43;

– US$14.40 in cash; and

– US$1 as a final cash dividend from De Beers.

The total value of the bid adds up to US$43.83 per De Beers linked unit. Chaplin cautions that the implied value of the diamond business may be seen as low. “If enough investors are dissatisfied, the documentation to be issued in April or May may increase the offer. So wait and see for now.”

Although Chaplin views the deal proposed by DB Investments as “complex,” he says it would serve the purpose of unraveling the cross-holding structure between Anglo American and De Beers.

At present, De Beers holds 35% of Anglo American, whereas Anglo holds 32% of De Beers. This cross-holding, which dates back to 1917, when Ernest Oppenheimer formed Anglo American, gave the Oppenheimer family effective control of both companies, even though its minority holdings were reduced over the years to just 7.2% of Anglo American and 2.6% of De Beers. “Whilst such structures were acceptable in South Africa many years ago, today they are no longer appropriate for large, international companies such as Anglo American,” Chaplin states.

The cross-holding has also caused De Beers, and even Anglo American, to trade at discounts to their underlying asset value. “Indeed,” Chaplin notes, “in recent years there have been times when the overall market value of De Beers has been only just above the value of the company’s holdings in Anglo American alone — with virtually no value being given to the diamond mining and marketing business. Over the past two years, the average value attributed by the market to the diamond business has been some US$3.1 billion.”

The current bid values the whole of De Beers at US$17.86 billion. The value being attributed to the diamond business is US$8.3 billion, excluding the US$9.5-billion value assigned to the underlying holding in Anglo American. However, Canaccord came to a different conclusion after doing its own valuations, based on comparisons with other deals, as well as other market factors.

“Our estimated total asset value for the diamond business is therefore currently around US$11.3 billion — or US$3 billion above the price being offered by DB Investments,” Chaplin writes, though he concedes De Beers’ 2000 earnings were “exceptional,” owing to a strong American economy and Millennium-related sales. “It is arguable, therefore, that the price being paid for the diamond assets is on the low side, particularly based on our assessed net asset value, but it should be borne in mind that the deal being proposed has at least unlocked most of the value in De Beers for the current shareholders.”

Chaplin notes that if enough shareholders are unhappy with the deal, the terms could be increased, as 75% of public shareholders must approve the deal before it can proceed.

If the deal does go ahead, Chaplin sees several major benefits for Anglo American. The company’s issued shares will be reduced by 10% to 367 million shares, and it will receive US$1 billion in cash, plus an increased stake in the lucrative De Beers diamond business.

“For Anglo American, we believe that this deal is good news, and we expect our target price to increase, probably to around 50 pounds per share,” Chaplin concludes.