Opinion
The $60 billion game that BHP boss Mike Henry needs to win
Elizabeth Knight
Business columnistMost contested takeovers often boil down to a game of chicken between the predator and the prey but has BHP bitten off more than it can chew with its $60 billion tilt for fellow resources heavyweight, UK-based Anglo American?
With the target unsurprisingly knocking back the initial offer, BHP needs to find the pricing sweet spot that will win it its prize. An offer that’s not so generous that it burns BHP shareholders but just enticing enough for Anglo American investors to bite.
BHP has made a $60 billion scrip bid for Anglo American.
BHP’s second offer will be one that decisively decides whether Anglo American is prepared to dance, or at least stand up and walk onto the floor. And that is when the fun will start.
If the offer is sweet enough, big shareholders (some of whom hold stakes in both companies) won’t hesitate to share their views with the respective boards. Most will be discreet, but some won’t hesitate to apply pressure publicly.
Activist investor Elliott Management has already bobbed up on the share register of Anglo American and is almost certain to push BHP to pay up.
BHP clearly has the cash to do that and Anglo American’s substantial copper assets make it a prize, but the real test for BHP’s boss, Mike Henry, is if he has the gumption to walk away from a deal that will not only define his career but possibly the future of the miner.
This is where Henry’s legendary discipline will come into play. BHP shareholders will rely on Henry and chairman Ken MacKenzie’s acumen to get their hands on Anglo American’s huge but underinvested South American copper mines without overpaying for them.
If he can pull it off, Henry will avoid retracing the footsteps of previous BHP bosses, such as Marius Kloppers, who ended up wasting billions of dollars on empire building acquisitions only to have them go pear-shaped.
And buying Anglo American is going to be one big, messy affair. There are plenty of assets inside Anglo American that BHP isn’t interested in buying and the terms of the initial offer flagged spinning off some of Anglo’s less favourable assets. Even those included in the proposed deal may be jettisoned by BHP at some later point.
The one thing, and quite possibly the only thing, that does matter to BHP is getting its hands on the world’s hottest commodity: copper. And opportunities like Anglo American, which offers to meaningfully increase BHP’s market share, are rare. BHP is already the world’s second-largest produce of copper, so the temptation to pay up is powerful.
Mike Henry has been chief executive of BHP for more than four years.Credit: Eamon Gallagher
Copper is not only the most sought after ingredient needed for the global green transition, there’s just not a lot of it lying around. When BHP acquired copper producer OzMinerals 18 months ago, it was clear enough about its belief that copper was set for a golden period and that a supply deficit would emerge within five years.
By BHP’s standards, its $10 billion play for OzMinerals was at the smaller end of the scale. The $220 billion mining giant needs a far bigger acquisition to move the dial. And Anglo American, or more particularly its copper assets, fits the bill.
It also ticks a number of other boxes for BHP, the most significant of which is the UK-based target’s underperforming share price. This presented BHP with an ideal moment to offer Anglo American’s disillusioned shareholders with an opportunity to hitch a ride with BHP (given the offer is for Anglo American shareholders to receive shares in BHP as payment).
Secondly, the size of this deal precludes most other minerals companies from entering the race.
For BHP, this could be a future defining deal because it recognises that the era in which iron ore sits at the heart of the company is slowly but surely on its way out, in part because of China’s ongoing expansion in Africa.
There is still plenty of time left to run for BHP’s iron ore, and it will remain the biggest earnings contributor for BHP for a while. But buying Anglo American is about fuelling the evolution of BHP, one which will be necessary if the 140-year-old company is to retain its mantle as the largest minerals company in the world.
Henry would certainly be keen to be the author of that outcome, but Anglo American’s board will be just as keen to secure their place in history as the sun sets on the storied mining company.
BHP’s initial offer valued Anglo American’s shares at 15 per cent above the pre-offer price but less than where the stock was trading in March last year. So, there’s plenty of room to move on price and the betting is in favour of a deal getting done once BHP returns with a better offer.
But both parties would want the price to be right, as a place in the history books beckons.
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