BHP woos South Africa in pursuit of $39 billion Anglo takeover

BHP Group Ltd. has deployed a team of senior executives to South Africa as the world’s largest miner ramps up efforts to win over government officials, regulators and local shareholders, all of whom could yet determine the outcome of its proposed tie-up with rival Anglo American Plc.

The executives have already begun conversations with key stakeholders, focusing on explaining the detail of the existing $39 billion proposal — currently back on the drawing board after it was rapidly rejected by its target — and its benefits, according to people familiar with the matter.

Despite its own historic links, BHP is starting on the back foot in South Africa, where the now London-based Anglo was founded and remains a household name, after its approach for the smaller miner last week caught senior officials off-guard. BHP’s complex proposal includes a plan for Anglo to spin off its Johannesburg-listed platinum and iron ore units before an eventual takeover of the remaining assets.

News that BHP wants an Anglo shorn of Kumba Iron Ore Ltd. and Anglo American Platinum Ltd. comes at a difficult time for the government. The country is due to hold a national election due later this month, a keenly contested race which could see the ruling party lose its majority for the first time since the African National Congress came to power in 1994. The opposition has already presented BHP’s bid as a stinging rebuke of the government’s handling of the economy in a country with one of the world’s highest unemployment rates and deteriorating infrastructure.

BHP’s team aims to engage with President Cyril Ramaphosa’s administration among other key stakeholders, the people said, laying out the exact detail of the multi-stage deal, plus the benefits of returning control of Amplats and Kumba to South Africa, with more of their cash flow likely to stay close to home and a larger free float on the Johannesburg Stock Exchange. South Africa’s state pension fund controls 8.4% of Anglo’s shares – only BlackRock Inc. owns more.

Even with more clarity, a charm offensive will be tough to pull off. Mining Minister Gwede Mantashe told Bloomberg on Wednesday, a public holiday in South Africa, that BHP had not yet contacted his department to explain its plans. Also the ANC’s national chairperson, he has said that he “wouldn’t support” the deal as currently outlined. The minister has criticized BHP for divesting its South African assets in 2015 through the creation of South32 Ltd., only 14 years after its merger with Billiton Plc.

BHP declined to comment.

Founded in 1917 by Ernest Oppenheimer, Anglo American has long ties to South Africa and was built on the back of the country’s gold mines before moving into diamonds. Over recent decades, however, the company has grown rapidly overseas, developing and buying coal mines in Australia, iron ore in Brazil and adding copper in Peru and Chile.

Anglo’s South African platinum and iron ore properties are going through troubled times. Amplats is slashing costs in response to slumping platinum prices and Kumba has cut output guidance due to the poor performance of state-run rail and port infrastructure.

If a sweetened offer is successful in winning over BHP’s quarry, Anglo itself will have a crucial part to play in helping the transaction over regulatory hurdles in South Africa, said Dawid Heyl, a portfolio manager at Ninety One, which has a 2.3% stake in the target company.

“I think they would be able to convince government and all of its bodies to let the deal go through,” Heyl said, adding that catch would make a hostile approach difficult.

If Anglo wants to play a “defense strategy” with shareholders, it can use its “position in South Africa to say it’s going to cost a lot of money in terms of capital gains tax or dividend tax to dividend Kumba and Amplats out to existing shareholders,” Heyl said.

South Africa will have opportunities to step in. The country’s Competition Commission has said the distribution of Anglo’s shareholdings in Kumba and Amplats to the group’s shareholders – a precondition in BHP’s opening proposal – would “very likely” require the agency’s approval. The subsequent takeover could also need sign off from the regulator since BHP would be buying manganese and diamond mines located in the country.

Regulators including the Competition Tribunal evaluate antitrust impacts but also “public interest” factors, including how a proposed acquisition will affect employment levels and historically disadvantaged people. Some concessions and guarantees there could win BHP more favor. Oil trader Vitol Holding BV was recently allowed to acquire service stations in South Africa as long as it buys products from local refineries, maintains employee headcount and increases employee ownership. Meanwhile, Amplats is currently considering a restructuring that could cut 3,700 jobs.