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Anglo’s rejection of BHP’s improved bid is part of the horse trading that goes on at deal-making time. What will really stir things up, according to one analyst, ‘is if another bidder enters the race’. From Moneyweb.

BHP’s revised offer effectively values Anglo at £34bn (R782bn). Image: Shutterstock

There is a danger that BHP ends up overpaying for Anglo American, which on Monday rejected the Australian mining giant’s revised bid for its global assets – minus those in SA (Kumba Iron Ore and Anglo Platinum) – as too low.

Anglo chair Stuart Chambers made it clear that Anglo is already focused on unlocking the kind of value that BHP believes it can extract via a takeover. What he’s saying to BHP is we can do it without you.

“The latest proposal from BHP again fails to recognise the value inherent in Anglo American,” said Chambers.

“Anglo American shareholders are well positioned to benefit from increasing demand from future enabling products while the increasing capital intensity to bring greenfield supply online makes proven assets with world class resource endowments ever more attractive.”

Anglo dislikes BHP’s proposed deal structure, particularly the undoubtedly lengthy process of unbundling Kumba and Angoplat and obtaining regulatory approvals.

It’s an untidy deal, there’s no doubt, with a potential tax liability for Anglo potentially running to $2 billion (R37 billion).

Mining companies haven’t exactly showered themselves in glory when it comes to deal making.

The last buying frenzy in 2013 was predicated on expectations of Chinese growth continuing to drive commodity prices, but that didn’t happen.

PwC found that the 40 largest miners spent $130 billion in that year for deals, swallowing four-fifths of their earnings before interest, tax, depreciation and amortisation (Ebitda).

Within a few years these overpriced assets were being written down on miners’ balance sheets.

Anglo’s persistent discount to net asset value has made it a takeover target, and BHP believes it can do a better job of uncorking value than Anglo’s current management.

Anglo shares fell on Monday following its rejection of the revised BHP bid, which is 14.6% higher than the initial unsolicited bid announced in April.

“We should not be surprised that Anglo rejected the improved offer from BHP,” says Peter Major, analyst with Modern Corporate Solutions.

“The Anglo board owes it to shareholders to get the best deal they can. The Anglo executives have a good deal going, they get good salaries, bonuses and share options, so they will play this along for a while.

“What will really stir things up is if another bidder enters the race. This, of course, raises the possibility that BHP or someone else ends up overpaying for Anglo. BHP doesn’t exactly have a great track record of deal making, nor does Rio Tinto, and what they seem to forget is that commodities are cyclical and they will get another shot at it later if they are prepared to wait.”

Despite BHP’s assurances to the contrary, the exclusion of Kumba and Angloplat from the deal is widely read as a vote of no confidence in SA.

Read: BHP’s bid for Anglo is a massive vote against SA
BHP says its bid for Anglo American is ‘not a reflection on SA’

BHP CEO Mike Henry was recently in SA to sell the deal and convince authorities and Anglo shareholders it is in the best interests of everyone.

BHP believes the combined entity would have stronger growth prospects, less risk and a world-beating portfolio of large, long-life Tier 1 assets focused mainly on iron ore, metallurgical coal, copper and potash.

BHP’s stronger balance sheet and $11.3 billion cash flow (R207 billion) would provide stability and provide the investment needed to grow its copper portfolio.

BHP upped its all-share offer by 14.6% this month, effectively valuing Anglo at £34 billion (R782 billion), made up of £27.53 (R633) per Anglo ordinary share, including £4.86 (R112) in Angloplat and £3.40 (R78) in Kumba shares.

Moneyweb understands that Anglo will be offered up to two positions on the BHP board.

Anglo’s copper assets have underperformed due to operational challenges and BHP believes it lacks the funds to scale up growth in its ‘transition’ commodities – copper, high grade iron ore for green steel, high quality, lower emission metallurgical coal.

BHP wants Anglo’s South American copper assets, which would give the combined group about 10% of world supply, making it a forceful player in the emerging green economy.

There’s also opportunities to improve productivity by combining Anglo’s Minas Rio iron ore operation in Brazil with its own Australian and South American mines.

Read: BHP’s R733bn copper play was years in the making

BHP mega bid and $10 000 copper expose mining’s biggest problem

The ball is now back in BHP’s court. It will have to decide how far in this game of bluff it is willing to go and whether it will simply walk away.