Melanie Burton and Scott Murdoch
MELBOURNE (Reuters) – BHP Group’s (NYSE:) options in the battle for rival miner Anglo American (JO:) include a watered-down $42.7 billion buyout offer, a hostile bid or a withdrawal for now as the deadline approaches May 22 . submit a binding proposal.
As BHP considers its next move, CEO Mike Henry and his team are on the sidelines of an investor conference in Miami and elsewhere making the case for the mega-deal to their investors, a significant number of whom also own Anglo shares.
“At this stage, I think BHP should, over the coming week, try to convince enough of Anglo’s institutional shareholders that it is worth putting pressure on their board to engage with BHP, with a potentially even higher offer on the table if it will happen,” analyst John Mills told Morningstar.
Anglo’s board has already rejected two all-share bids from BHP as inadequate and too difficult to implement, and on Tuesday unveiled plans for a split to focus on transition energy metals while spinning off or selling less profitable coal, nickel, diamonds and platinum businesses.
The plan was met with tepid support from Anglo investors, who said it represented a strategy but did not go into detail.
With the exception of Anglo retaining its iron ore assets in South Africa and selling its coal mines in Australia, this was also similar to BHP’s own plans for the takeover target.
“I think they (Anglo) need to demonstrate why a bird in the hand is no better than two in the bush,” said Anglo investor Todd Warren of Tribeca Investment Partners.
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One of Anglo’s top 25 investors said there was nothing compelling about the company’s restructuring proposal, causing shares to close 3.2% lower at £26.195 on Tuesday, below BHP’s latest offer of around £27.53. share.
“Anglo management needs to push for a raise. Another 10%. And then wait for Glencore (OTC:),” said the investor, who requested anonymity due to the sensitivity of the matter.
Swiss commodities group Glencore is studying a possible bid from rival Anglo, Reuters reported this month.
“We continue to believe the risk of breach remains high,” JPMorgan analyst Lyndon Fagan wrote in a note published Tuesday ahead of Anglo’s restructuring announcement.
Rio Tinto (NYSE:) CEO Jacob Stausholm said Tuesday that his company is not afraid of mergers and acquisitions, but has strong organic growth opportunities.
BHP, Anglo, Glencore and Rio Tinto declined to comment on Wednesday.
BHP OPTIONS
Under British rules, BHP has one week to make a binding bid for Anglo or face being forced out for at least six months.
As an argument in favor of the buyout, BHP pointed to the successful spin-off Yug32 (OTC:), spinning off its oil business from Woodside (OTC:) Energy in 2022 and selling coal assets as evidence it’s a safer pair of hands, according to slides from Henry’s presentation in Miami.
The company also flagged execution risk after Anglo management failed to implement a “new Anglo” vision in 2016 that would have simplified the mining company’s structure and turned its core portfolio into diamonds, platinum group metals and copper.
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The possibility of being hostile and taking its offer directly to Anglo shareholders is not new to BHP, which unsuccessfully did so in 2007 with a $140 billion all-share bid for rival Rio Tinto. The company also made a hostile $39 billion bid for Canada’s Potash Corp in 2010, which was blocked by the Canadian government.
But two sources familiar with the matter said BHP would not take such an approach because it needed the involvement of Anglo’s management to clear regulatory hurdles in South Africa and help the company achieve maximum value for shareholders. BHP also needs an agreed due diligence period to review Anglo’s books, they added.
BHP also told investors it would not waive Anglo’s demand that the South African businesses Kumba and Anglo American Platinum be separated as a condition of the deal. Offering a binding price at a price already rejected by Anglo would force BHP to buy the entire company, which it is not prepared to do, a source familiar with the matter said.
This narrows the scope for BHP to revise its offer in favor of improving the share ratio, adding some cash or a combination of both.
It could also decide to leave, as Xstrata, later bought by Glencore, did in a proposed $96 billion merger of equals that was rejected by Anglo’s board in 2009.
BHP has told investors Anglo is not a make-or-break deal and may need time to reassess as the prospect increasingly gets priced into BHP’s share price rally, one investor said.
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BHP shares rose 2.6% on Wednesday.
BHP could return later when Anglo restructures further, although it would require a higher price, the investor added.