BHP’s ‘unbundle’ demands on reveal for Anglo is an indictment on SA financial system – Piet Viljoen

well big news out last night is that BHP buletin uh the company well known in South Africa because of the merger that created it with the old gen cor which became buletin it's making a bid for the 107 yearold Anglo amam Corporation once the giant of South African business we're going to talk to pit fun from.

Merchant West to get insight into whether the bid is going to go ahead in other words if it will be successful and indeed why now pit good to be talking with you fresh from BNC 6 only a month ago and yet here we are you know we're looking.

At a at perhaps a transformative transaction for South African companies but interesting to see the reports that are coming from overseas to say for BHP not really transformative it's only about a a quarter of the size of what BHP is now what a difference from the past exactly I think it just goes to show how far South Africa is falling.

Behind its Global counterparts the Anglo American which is once a jewel in the crown of the global mining industry is actually now just a quarter of the size of BHP which has a while ago I mean 20 going back 20 years ago uh the merger of BHP buletin as you pointed out created this business uh um and sou African assets were the.

Core of that business called BHP bulletin but those assets have been jettisoned and closed down long time ago um and I think the same might happen to Ang South African assets now as it is quite extraordinary when you hear from a global company that wants to buy another uh or one of its Rivals that one of the preconditions will be you've got to get.

Rid of certain parts of your business which are in that country given that uh it they've did this once before with 32 maybe you could explain that history so South 32 if I recall was um unbundled out of the bulletin portion that went into BHP um and that was a sou African um mining assets Chrome and other top assets don't recall exactly what they.

Owned or still own uh but that was the South African portion of that was unbundled out of BHP bulletin and I think BHP and this and these talks are asking anos to do s sort of thing unbundling the B of the ass has been Kumba and templats before the transactions cons but going back uh a few decades even three decades ago.

Anglo-american was the giant in South Africa it owned so much of not only the mineral resources but of the industrial side as well what's happened here pit just for people who've been maybe gone to Mars for 30 years and came back what how would you explain it to them look very simply um during the sanctions ER um large corporates accumulated big.

Sprawling empires of Assets in South Africa because foreign owners were forced to sell them so company like Anglo American which is a mining business also had a subsidia called emic which was an industrial investment holding company and in there owned all sorts of industrial assets as well and financial assets remember they also own.

First naal Bank in those days they bought Barbe from bares and he named the first bank so Ang American the spoiling Empire African when the economy opened up again in 1994 over time they have sold un bundled all their non-mining interests so they become smaller and rationally so because you don't you know you don't want a business that is a.

Minor and a bank and a and owns industrial assets like M and those sort of things so um it's it's become much more focused on mining um uh but then what's happened since then is because of uh the inet government in South Africa and the poor management of the infrastructure South African mining assets values have fallen far behind the.

National counterparts and the Australians at BHP in Melbourne say they want none of it they don't they'll do the deal they'd like to do the deal but they actually don't want to have anything to do with South Africa which is sending a bit of a signal I think it's sending a strong signal but this these signals have been sent by.

Corporates for years and years and years now where you know I can understand a foreign entity doesn't want to invest in a country where they have to give up 30% of the economic proceeds to a be partner for nothing in return or very little in return um so it makes it very tough to do business in for for anyone uh and it makes us very uncompetitive uh so it's.

Quite understandable that they want nothing to do these assets on top of that if you look at Kumba um it's a good business um but it cannot deliver its product to Global markets because of the infrastructure collapse so you know who would want to ear that why is BHP making this bid for anglo-american in the first place if it comes with so many.

Complications well it I don't think it's that complicated Anglo American has a couple of core assets um of which copper uh it's South American copper uh assets are um are one and that is a very attractive as they call it in the market future facing metal copper you know you want to Electrify everything when you need copper um batteries C for for.

Transmission infrastructure and all those sort of things so copper is a very important future facing metal and Anglo has very good copper Assets in South South America so those are very attractive to uh to vhp um and uh so so I think there are some attractive assets there uh and I think it would make sense I mean I think.

If you put those two if you put bhp's copper acids together with Anglo copper acids they would control 10% of global copper output which I think puts them in a very strong position Chinese won't like that though given their Reliance on on copper Imports I guess so I guess so um but you know uh I think you have to build your business the best way you can.

I think from BHP point bhp's point of view um this makes a lot of sense is there anything the South African government could do to block it I'm not sure I think Anglo American is Incorporated in the UK I'm not sure it is uh the Anglo American PLC is subject to South African uh more but politics does have influence um but I think the.

Politicians yeah short sightly would probably welcome the unbundling of things like Kumba and and plats because they become more South African I think that would be the politicians view they would sort of welcome that uh but I think it's very shortsighted but then politicians AR known for their long-term views so not really politically.

Sensitive even though we've got an election coming up you would have thought just on the sidelines let the election go it's only a month's time and then maybe launch your bid so I'm just wondering about the timing of there's any relevance there yeah I think the timing probably is not as much to do with the sou afcan elections which in a.

Global business like BHP which is uh the business itself is probably multiple times the size of souan economy um I don't think sou African elections are that important to them I think what's more important is the downdraft in the share price of something like angos over the past year or so and taking advantage of that to to make a.

Opportunistic bit to acquire control of some attractive assets so if I understand correctly anglo-american share price has well it's massively underp pored BHP uh blumberg when they ran the story which we've got on bus news this morning it shows that in uh in the last three years in the last two years it's underperformed by.

45% so anglo's share prices underperformed perhaps influenced by its big uh focus on South Africa or significant focus on South Africa and our bhp's opport istically going in there and saying well we'll buy those good assets and leave the South African ones behind yeah I I think that's exactly what's happening it's it it is.

Sometimes just as simple as that angas has underformed because it has big exposure to underperforming South African assets uh and you have to say that you know what is the light in the tunnel for Kumba I mean they just can't get the iron all to the ports because of the collapse of the government controlled infrastructure uh plus then.

You have the government rules which say you have to have a be partner which owns 30% of your Venture um for nothing in return uh and same goes for amplats and then you have to think that maybe they're questioning long-term viability of the plat Ministry per se um know so so there's those question marks so it makes sense to unbundle those and the.

And the Jewel in the ground for them would be the the Cass what is interesting is they have not made the same requirement or expressed it on diamonds De Beers which is the original um founding block of anglo-american coming all the way back to cesil John roads what what's the can we read anything to that do do you think they.

Want to move into the diamond industry look I I think the diamond industry has a long-term future as opposed to the question marks around the Platinum industry I don't know Platinum might or might not have a long-term industry but I'm I'm fairly certain that diamonds does have a long-term future uh so and it is an attractive.

Market it goes through Cycles it's going through a down cycle at the moment which incidentally is probably a good time to get exposure to it um and I also don't know what sort of sheld agreements there are between anglos and the beers maybe there are certain causes in that agreement which uh which would uh trigger um certain events in case of a.

Takeover which might stop them from unbundling it or separating it from the ramp of the others I don't know what's in there one can always speculate as to that but as for the diamond industry I think it has a long-term future and is going through a downturn at the moment which is a good time to get exposed it is interesting as well that the diamond.

Business is very exposed to Botswana which doesn't seem to bother the Australians at BHP too much yeah and then what just last year um I think renegotiated agreement with the beers to uh allocate as large a percentage of the revenue shared to the government so even to but that yeah so Bon I think is important and is also important in the.

In the case of beers so that's uping down the coast of Africa but the the important thing is I don't think diamonds on that are that reliant on government run infrastructure which I think makes it a bit different to some eles okay pit you've seen a lot of these kind of bids and Deals uh it's it's Mega in a South African context talking about.

The current share price of anglo-american has gone up to 33 billion PS from the bid at around 27 billion just explain that because clearly shareholders are telling us that they think there'll either be a counter bid or BHP will raise its its offer because you they're not going to be buying shares at 33 billion pounds if the.

Company's only going to be sold for 27 yeah so so I think the market is speculating um as to counter offer uh again the copper assets that Anglo ears are attractive um BP can afford a premium because there are some cost synergies between two business that can be taken out which would crw to the new owner BP.

Uh but I think the C of B BHP is also on record as saying they will not overpay Acquisitions they have made one or two um highly priced Acquisitions in the past few years uh and they know they've done that they know they misallocated capital in that regard fortunate wasn't too big in their life but it was still a misallocation of capital and I think.

They're not going to do the same thing here they're not going to overpay generously overpay so if there is a b War I expect it to be quite a muted living and those assets weren't they largely put together by Cynthia Carroll who was the CEO of anglo-american and and got fired for for doing just that well I'm not sure I I think um and I I.

Might be mistaken here but um I'm not sure any of the current assets on anglos were originated during Cynthia Carol's top I think what she was doing mainly was buying back Anglo American shares at very very high prices the top of the commodity cycle in uh 20072 2008 um that was a big cap on that location buback shares at extremely high.

Prices which destroy tremendous shareholder value and using debt um uh thinking back now over I do think maybe the iron ore South American Iron or operations were started during her tenure so that there is that portion but Ang is what it is and what it has been for a long time in other words not not a great performer it seems to have.

Been it's a little bit it it feels to me a little bit like uh the shoppr Pick and Pay story where Pick and Pay was the market leader Anglo being the market leader and yet here here BHB buletin is four times the size of Anglo today even after selling off its oil and gas uh operations some time ago so it's it's selling Office South African assets um.

You know so it's it's reduced a lot of what it had where it was BHP buletin and it's still for size angas which just shows it the extent of underperformance which is not all Ang's Management's fault I mean they did make some Capital allocation mistakes but the problem is that the bulk of the assets operate in the economy which is midcurrent uh which.

Allows no scope for growth so there's a big signal there um talking to shareholders you could imagine some people on the sideline saying I want a little bit of this action is it smart to buy Anglo shares today on the prospect of it being bought out I think if you buy it today's price I think the the buy out the bid is basically in the price.

Today um so I'm not sure there's a lot of upside from here unless a vigorous bidding whole commences I don't know if that'll happen or not I I think that odd are less than 50% um I think the asset to own is still BHP which is what we own in the Mission West value fund uh it's it's a well-run business uh it generates significant.

Cash and I think it'll be a better business off this acquisition that's interesting when you had a look at the two of them and it is a value Fund in other words you looking at what gives you the best well you're paying the less uh price possible in every dollar for a for a company why did you go with BHP rather.

Than Anglo American given that people have been talking about Anglo being bought out for a while yeah so so I think over the past 18 months we have uh moved the merchant West investment value fund more towards the quality side of the spectrum uh but not moving away from value remember what is value value is.

The present value of future cash flows and a value investor tries to buy those cash flows for less than the present value uh so to the extent that we can forecast BHP bulletin's future cash flows which I'm not sure we very good at but we can sort of get a handle on that forecast um we think the market is uh has been and continues to underprice uh.

BHP bullettin Rel ative to their future cash so the stock to buy if you do want to um pay or have an interest in this Mega takeover would be BHP rather than angler and what are the chances of this going through just obviously you don't know and there's a lot of water that still has to flow under this bridge this just initial sort of skirmish uh in a.

Big battle which could turn into a big war over time so it's hard to say um what the timing is going to be but I think it will uh it going take a while uh but I think um just sitting in the BHP share is a good place to be for the is the chairman of recm and he manages funds at Merchant West Investments and I'm Alec hug from bus news.com.

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