July 4, 2018 / 2:58 PM / 4 months ago

Breakingviews - Agarwal’s Anglo American carve-up looks a stretch

A pit head is seen at the Tumela platinum Mine , an Anglo American open pit mine Australia's Bheki Msobo (L) plays a shot during the second T20 International match against South Africa at the Wanderers Stadium, Johannesburg

LONDON (Reuters Breakingviews) - The fog surrounding Anil Agarwal’s intentions with Anglo American is only slightly thinner. The Indian billionaire is mulling a merger of his resources group Vedanta with the global miner’s South African operations, Indian newspaper Mint reported on Wednesday. He faces an uphill struggle.

Agarwal’s near-20 percent interest in Anglo, whose equity and debt are worth $35 billion, gives him a pulpit. But he doesn’t actually own the shares: instead he’s paying a 4 percent coupon on bonds that convert into equity in 2020. The tycoon has until then to achieve what he wants with the group, which probably involves a deal with Vedanta, of which he owns 66 percent.

A cash offer for Anglo South Africa would be a stretch. Factoring in Anglo’s majority stakes in the listed Kumba iron ore and Amplats platinum, plus smaller holdings and net cash, it has an enterprise value of around $12 billion. Throw in a further $6 billion to acquire Agarwal’s 20 percent Anglo stake, and Vedanta’s already high net debt would triple to $27 billion.

Alternatively, Agarwal could lobby the Anglo board to spin off the South African assets and splice them together with Vedanta. Yet Anglo’s other shareholders may not be so keen. The synergies between the two entities look limited, and investors would have to take exposure to a more leveraged entity.

Moreover, the case for a breakup is not compelling. Agarwal could argue that the group trades at a discount to the sum of its parts. At 17 pounds a share, Anglo’s equity is below a 26.5 pounds a share valuation calculated by Jefferies analysts. But that assumes that the De Beers diamond business should be valued at a luxury-type valuation of nine times its EBITDA. With assumptions including a more sober seven times De Beers multiple, Anglo looks fairly valued. 

The biggest challenge may be persuading the South African government to play ball. A quarter of Anglo’s capital is deployed in the country, which sees it as a national asset. If Agarwal really wants a breakup, it makes more sense to merge Vedanta with Anglo’s international assets, which include Chilean copper mines and De Beers.

Assume Anglo handed each investor shares in a new international company. The Public Investment Corporation, a South African pensions entity that controls 13 percent of Anglo, could swap its new shares with Agarwal’s stake in South Africa, as both would both be worth between $2 billion and $3 billion, according to Breakingviews estimates. The PIC would end up as a dominant shareholder in a pure national champion, while the Indian tycoon would own a bigger stake in the international business. Even then, he may struggle to persuade Anglo’s other institutional shareholders why they should back him.

Breakingviews

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