After the Bell: BHP and Anglo now have to explain the riddle wrapped in a mystery

UK statesman Winston Churchill, who served as Prime Minister of the United Kingdom twice, from 1940 to 1945, famously said of Russia just before the start of World War 2 that it was “... a riddle wrapped in a mystery inside an enigma”. Churchill, and indeed the West in general, was astounded that Russia and Nazi Germany — seemingly two staunch enemies —  had signed a non-aggression agreement, the Molotov-Ribbentrop Pact. The pact was later repudiated by Hitler and the sides reverted to their clashing ideological foundations. But the phrase has endured, partly because of Churchill’s enormously adept descriptive prowess. 

In modern South Africa, there is one institution I find to be a riddle wrapped in a mystery inside an enigma, and that is the Public Investment Corporation (PIC). It is, of course, SA’s most pivotal financial institution, being the government-controlled asset manager of the pensions of state employees. 

The organisation has R2.6-trillion in assets under management, which means it’s necessarily germane to almost every aspect of SA corporate affairs. Yet it has made a grand total of six public statements this year. One comparator organisation, the California Public Employees’ Retirement System, is so transparent that it has its own blog. 

And don’t think you can talk to anyone at the PIC about anything. Questions from the press go unanswered; the PIC’s press releases don’t specify any individual — there is just an email address; and it very rarely holds press conferences. The organisation is run with the professionalism of a high school stamp collection committee. 

Why is that? I think it’s because the organisation is all at sea. Its mandate is to stimulate business in SA, but every time it tries, it makes such a hash of it that it ends up losing money. (Hello, AYO.) So, what it does is to be basically a tracker fund; it has a little bit of everything. And this is not rich investors’ money; it’s the scanty savings of old state employees, often scratching for a few cents to buy a loaf of bread. The reason it’s so closed is that the organisation doesn’t want to be pounded by tenderpreneurs with political clout for slices of its enormous wealth. 

But now and then, it has to say something, and the potential disappearance of SA’s most storied company would be one of those times. As we all know, Australian mega miner BHP has made its third offer for Anglo American, incrementally increasing its bid each time, all of which Anglo has turned down. However, crucially, Anglo on Wednesday opened the door to face-to-face discussions.

What that usually signifies is that the deal is more or less done, but they just have to wrap up some of the outstanding details and Bob’s your uncle. Yet in this case, Anglo’s share price suggests something different: that the deal is actually far from done, since it’s trading well below the offer price. Obviously, the key issues are those “outstanding details”. 

So the PIC chose on Wednesday, just hours before BHP’s bid offer closed, to make its feelings known. Why would you do that before the markets close on the day of the “put up or shut up”? I don’t know — see the “all at sea” comment above. And what did it say?, you ask in eager anticipation. To be honest, I only have guesses.  

The statement called for “a meaningful revision of the current BHP proposal that should take into consideration the material risks that current shareholders of both Anglo and its subsidiaries would have to assume over an extended time frame”. In addition, “there has to be future and perpetual participation by South African shareholders in the acquired assets through the JSE”. These are amazingly bold demands for an institution with an itsy-bitsy 7% stake.

Let me see if I can decode this in terms of the structure of the deal because, on its own, it’s mystifying. How can anyone dictate the “perpetual participation” in the acquired assets of SA shareholders, or any shareholders for that matter? It doesn’t make sense. 

I think the key is the phrase “Anglo and its subsidiaries”. What Anglo is worried about is that SA’s trade and industry minister, Ebrahim Patel, is going to stick his oar in, as he always does in takeover negotiations, to extract a plethora of promises, investments and undertakings. That would normally be a problem for the takeoveree rather than the takeoveror.

However, in this case, since BHP has structured the deal so that it won’t be taking over SA assets — precisely, one suspects, for this reason — the only companies Patel could leverage would be the assets left behind, Kumba and Anglo American Platinum (Amplats). That means SA shareholders will be taking the spankings by the headmaster, which Anglo thinks would be unfair. I agree.

So, what are the options here? Well, what Patel wants (and in this case and many others, Patel and the PIC are interchangeable) is not only leverage now as the deal is done, but ongoing leverage. This is where the “perpetual participation” issue comes in. 

He wants BHP to make itself available for future bullying by the SA government, which is standard practice these days. To achieve that, one of the things BHP could do is unbundle Amplats but hold on to Kumba. The problem for BHP is that if it does so, the Chinese competition authorities are going to have a cadenza. BHP already has a huge stake in the iron ore industry and the Chinese competition authorities will object to it assuming control of Kumba, which also sells iron ore to the Chinese. 

What else could BHP do? It could undertake to make new investments in SA, in Africa, or both. It could undertake to pay the costs of the retrenchment of huge numbers of Amplats employees now facing the chop. It could put even more money on the table, which it might have to do anyway for a recommended bid. Or, it could make wild promises and not keep them, which seems to be a viable option these days too. 

But none of these options is particularly desirable and, honestly, South Africans have become inured to arbitrary government diktats. But I think it would be kinda fun to see BHP execs trying to explain this to Australian shareholders. All in all, I suspect the market is looking for a bit of clarity about what precisely this might mean financially before pricing the deal at the offer value. We will see over the next week or so. DM