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Diamonds fail to make the cut as Anglo American turns down BHP offer

Mining giant BHP Billiton logo sits on the outside of their head office in Melbourne, Australia, Thursday, Nov. 27, 2008.
Mining giant BHP Billiton logo sits on the outside of their head office in Melbourne, Australia, Thursday, Nov. 27, 2008. Copyright Scott Barbour/AP2008
Copyright Scott Barbour/AP2008
By Indrabati Lahiri
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A decision to demerge or sell its diamond and platinum businesses is expected to go a long way in maintaining Anglo American's profitability, by focusing on the more lucrative copper and iron ore businesses.

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Mining giant Anglo American has turned down a £34 billion (€39.48 billion) takeover offer from BHP, the world's largest miner. In addition, it says it will be looking at demerging or selling its platinum business, Anglo American Platinum, and diamond company, De Beers. The company is also likely to do the same with its coking coal business.

Instead, Anglo American plans to put more resources into its iron ore, copper and crop nutrients businesses, to strengthen its position as the green transition progresses further.

The company said it had rejected BHP's takeover bid because the offer undervalued Anglo American and was not attractive enough to shareholders, which could leave the business at greater risk from the uncertainties of a takeover.

Also, as both corporations have significant mining interests, there could also have been problems regarding anti-competitiveness if plans for a merger pressed ahead. 

However, a number of investors have not entirely supported Anglo American's decision to reject the BHP offer, which has also led to the company being further pushed to justify its decision and highlight how Anglo American can continue to be profitable as a standalone company. Demerging relatively less profitable branches of the business, such as its diamond and platinum arms, is expected to be a big part of this plan.

With increasing profitability in mind, Anglo American has also announced it will be cutting costs in several other areas, such as reducing investments in the Woodsmith fertiliser project.

BHP fails to recognise Anglo American's "inherent value"

Stuart Chambers, chairman of Anglo American said in a statement: "The latest proposal from BHP again fails to recognise the value inherent in Anglo American. Anglo American shareholders are well positioned to benefit from increasing demand from future enabling products while the increasing capital intensity to bring greenfield supply online makes proven assets with world class resource endowments ever more attractive.

"The Anglo American team is focused on delivering against its strategic priorities of operational excellence, portfolio simplification and growth, and is set to accelerate delivery in order to unlock this inherent value.

"The BHP proposal also continues to have a highly unattractive structure. This leaves Anglo American, its shareholders and stakeholders disproportionately at risk from the substantial uncertainty and execution risk created by the proposed inter-conditional execution of two demergers and a takeover."

BHP's chief executive officer, Mike Henry, said in a statement of response: "BHP put forward a revised proposal to the Anglo American Board that we strongly believe would be a win-win for BHP and Anglo American shareholders. We are disappointed that this second proposal has been rejected.

"The revised proposal represents a 15% increase in the merger exchange ratio and increases Anglo American shareholders' aggregate ownership in the combined group to 16.6% from 14.8% in BHP's first proposal. BHP and Anglo American are a strategic fit and the combination is a unique and compelling opportunity to unlock significant synergies by bringing together two highly complementary, world class businesses.

"The combined business would have a leading portfolio of high-quality assets in copper, potash, iron ore and metallurgical coal and BHP would bring its track record of operational excellence to maximise returns from these high-quality assets. The combined business would also have the balance sheet strength, capital discipline and operational capability to execute the attractive pipeline of growth options in BHP and Anglo American's portfolios.

"In putting forward a revised proposal, we have been guided by our capital allocation framework and our view of the fundamental value of Anglo American and BHP. The combination is consistent with BHP's strategy and the revised proposal is underpinned by a focus on delivering long term fundamental value."

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