Monsters of Rock: Is there too much risk in BHP-Anglo deal?

BHP puts its foot in the door at Anglo, securing a one-week extension to improve the terms of its offer
Anglo American’s board knocked back a bid priced at upwards of £31/share
BHP and commodity crunch send mining indexes spiralling

BHP (ASX:BHP) has its foot well and truly in the door of the Anglo American boardroom, securing a one-week extension after the London listed mining giant waved off its third and final offer.

The $73 billion punt came in at £31.11/share, well above its initial greeting at £25.08 and follow up of £27.53.

That still includes the distribution of Kumba Iron Ore and AmPlats to Anglo’s existing shareholders but ups their holding of the merged entity from 16.6% to around 17.8%.

That’s likely not enough to get existing BHP holders, some of whom own both companies, to get really mad and clearly enough to get Anglo talking.

BHP shares of course immediately plunged ~3%, cutting out some of the deal value, though it could rebound over time. It’s always been thought an offer over £30/sh would get it into the ears of Anglo’s board and major shareholders, a day after South Africa’s influential Public Investment Corporation said it wanted BHP to significantly improve its offer for Anglo.

At £31.11, is the offer too risky now for BHP investors?

RBC’s Kaan Peker suggests so, saying the new bid prices in synergies the investment bank just can’t find in the pursuit of Anglo’s Los Bronces, Quellaveco and Collahuasi copper mines.

“When accounting for Synergies and the undisturbed AAL valuation, we get a price of £25.6-27.4/sh. Today’s offer of £29.34/sh (on undisturbed pre-bid Anglo and BHP prices), is well above the top-range of what we see as being value accretive,” Peker said.

“…we estimate the revised final offer factors in synergies in excess of ~US$7b, plus operational recovery and long-term growth projects (that may or may not eventuate) from AAL’s key assets such as Los Bronces, Quellaveco and Collahuasi. We believe there is too much project and Synergy execution risk in our view.

“Final Offer Ratio is conditional. We think that none of the conditions have been met at this point in time, and this has to be considered the “Final Ratio”, suggesting BHP will no longer bid against itself (at least for a set period of time), but may in-fact mean it can make a supplementary cash offer.”

And that’s tanked the ASX materials sector

BHP is around 10% of the ASX 200 and even more of the materials index, with its pounding sending the sector 2.24% lower.

And it wasn’t the only big miner getting towelled up, with iron ore compatriots Rio Tinto (ASX:RIO) and Fortescue (ASX:FMG) also big losers as Singapore iron ore futures fell more than 2.5% off yesterday’s two month highs of more than US$120/t.

Stats from the World Steel Association showed global crude steel output fell 5% YoY to 155.7Mt in April.

Base metals also fell heavily with both copper and nickel down over 4%.

“Profit taking accelerated in the copper market amid the risk-off tone across markets,” ANZ Research’s Adam Boyton, Brian Martin and Daniel Hynes said.

“The red metal has gained more than 22% this year, with the rally accelerating in recent weeks as a rush of investors bet on a tightening global market.

“However, signs of lacklustre demand in China were enough for some to close out bullish positions and lock-in profits.

“Chinese copper rod producers have cut or stopped production due to slowing sales, according to Mysteel Global.”

TEN-BAGGER: READ: Peak copper, weak nickel may be a sign to pivot