After the Bell: BHP’s game plan and the tricky process of not getting punched in the face

We’ve all heard boxer Mike Tyson’s famous phrase, “Everybody has a game plan until you get punched in the face.” Tyson’s quotable quote is a testament to the concept of unfolding, because although things look inevitable, when you look back, often they are not. And on that topic, Tyson himself has a follow-up to his quote: “When you do get punched in the face, it’s time to start thinking about plan B.” And so it could go on.

With that in mind, how is the BHP offer for Anglo American unfolding? Well, it’s still early days, but things have been happening behind the scenes that bear some thinking about.

The first is the statement from the Competition Commission that the distribution of Anglo’s shareholdings in Kumba and Amplats to the group’s shareholders, which is a pre-condition of the deal, would “very likely” require the institution’s approval. In addition, the subsequent takeover would in any event also need approval because BHP would be effectively buying some manganese and diamond mines.

This is typical of our beloved Competition Commission because God forbid that anyone should do any business in SA without the commission sticking its oar in. It would be fine if there was some actual ore to stick the oar into. But sadly, there is not.

First, BHP does not mine any manganese to which it would be adding Anglo’s stake, so I don’t know where the commission gets the idea that there could be anti-competitive effects. Unless of course, they did a Google search and came up with the fact that BHP did mine manganese before the unbundling of South32 in 2015. But the commission wouldn’t make that kind of simple error, would it? (Yes it would).

In diamonds, of course, the commission would have a look-in because in buying Anglo, BHP would effectively be buying De Beers’ Venetia mine. But the problem for the commission is that BHP sold its very small diamond interests a few years ago, so there would again be no conceivable market concentration reason why the South African competition authorities would have a legal basis to intervene. The same, of course, applies to the Australian and European authorities.

What, you may ask, about the change in the Competition Act last year, effectively giving the competition authorities the right to dictate terms in inward investment (something business loves)?  Well, sadly for the ever-vigilant commission, as dedicated as it is to undermining the free flow of business, the amended version of the legislation doesn’t apply to this deal for the very simple reason that it is structured so that the legislation doesn’t apply.

The new competition laws allow for the trade and industry minister to dictate terms in the case of a local takeover but in this case, of course, there is no takeover of South African assets, there is only the distribution of shares to existing Anglo shareholders. And, on my reading, that does not require competition authority sign-off because there is no concentration or change of ownership.

Not only is there no takeover of SA assets (outside of the diamond interests), but you could argue that detaching Anglo’s dominance over Kumba and Amplats would be good for SA’s business environment! As it is now, any expansion or growth either company might have wanted to do has had to be approved by Anglo’s British-dominated board.

It’s surely significant that Anglo’s recent expansion was to start a complicated mine in the UK, which will cost around $9-billion to produce a fertiliser mineral for which there is currently little demand. The fertiliser, Poly4, does have potential, but it will require farmers to be convinced to change their existing farming practices. And knowing farmers a little, I don’t think this is a given.

This brings me to the second bit of unfolding news, which is that BHP has deployed a team of senior executives to SA to try to win over government officials, regulators and local shareholders to the idea of the deal. BHP CEO Mike Henry reportedly arrived in Cape Town on Thursday.

This is not an easy sell — BHP’s recent history has been to disinvest, not invest, in SA and, for that matter, the African continent as a whole. It’s extraordinary that the world’s largest miner has assets on almost every other continent, but not this one. That might change in future, of course, and BHP has been looking at assets in Tanzania and the DRC, but nothing has come of that yet.

The question is: What could the BHP execs possibly offer SA government officials that might smooth some ruffled feathers? The one thing they could put on the table is diamond producer De Beers, which they have already said they would sell if the deal goes through. Could they undertake to sell De Beers to an African company? Or relist De Beers on the JSE? Or perhaps just sell De Beers’ mines separately and sell Venetia to a South African group?

All of these things are conceivable, but they would be tricky. Should the $39-billion deal go through, then De Beers would be owned by BHP and BHP shareholders are not going to be thrilled at the idea of the company being sold below value just for the sake of some feather unruffling.

BHP on Thursday did “clarify” that “the proposed structure [of the bid] does not reflect a view of South Africa as an investment destination and is based on portfolio and commodity considerations”. Ja, right. So why then are you conceptually keeping Anglo’s Brazilian iron ore operations but not its South African iron ore operations? BHP did say that it was keeping its JSE listing but then it also said it was keeping its dual listing in London and Sydney until it didn’t. And it said it was committed to Africa, until it wasn’t.

These guys make this stuff up as they go along. And that’s not a terrible thing. As Mike Tyson says, everyone has a game plan until someone hits you in the face. DM