Johannesburg — WITH the pleasantries now over, the real tactical game can begin. Xstrata has written a nice letter to Anglo American's management, which it has graciously allowed the public to view. Anglo has dropped it casually in the bin. With the first round of betting now over, the decision sits with Xstrata: double- down or fold?
The position of the two mining giants is full of nuances and contradictions. In the left corner, you have a company with an embellished and assured sense of itself, based on an awesome history, technically, managerially and historically. Anglo might be in a state of reorganisation, but it's also not a force to be trifled with.
For the past decade at Anglo the managerial mantra has been "focus" as the group shed industrial holdings to become a mining company first and foremost. With the recent sale of its AngloGold Ashanti stake, this process seems pretty far down the line. But as anyone who has been involved in a reorganisation this size knows, the process is massively disruptive, time- consuming and fraught with unexpected complications. Whether this process meant that Anglo took its eye off the ball is a matter of your prejudices and perspective.
Personally, I think it did, and in particularly it fantastically misjudged the rise in commodity prices in 2003. These, of course, have come off, but in not capitalising on the period of low prices, Anglo missed a crucial trick.
In addition, if you look at the structure of Anglo now, it's hard to argue it is ideal. Too many of the most important assets lie outside of direct control of the group, notably De Beers, Kumba and Anglo Platinum . These companies all form crucial parts of the total Anglo picture, and Anglo's position is way beyond that of an interested shareholder. Yet its structural and legal position is exactly that.
The structure of the companies is particularly at odds with Anglo CEO Cynthia Carroll's campaign for "one Anglo". One consequence of this odd structure is a larger head office than seems necessary. One of the consequences of that, and the reorganisation, is an edgy, slightly poisonous atmosphere as managers juggle for position and influence. It's really not hard to find people in the organisation and outside it who think Carroll is "under pressure", code for the fact that she has plenty of internal enemies.
Presumably, the need for a fundamental rejuggle was in Anglo chairman Mark Moody-Stuart's mind when he hired Carroll. He wanted a fierce outsider with the presence of mind to reorganise in a moderately aggressive way, while maintaining good relations with various governments, and improving on-mine management.
Yet, through years of prodding and pushing, and although substantial improvements are evident, this process cannot yet be said to be at an end. I'm really not close enough to the operational side of Anglo to make a judgment on its overall efficacy; from the outside there seem to be areas of profound excellence, and some examples of underperformance. Yet one thing the group's long history has provided is a valuable set of assets. But what good are these assets if they are not brought to the surface effectively? This is where the fighter in the right corner comes in.
Xstrata CEO Mick Davis seems to have an extraordinary touch. To have built a group the size of century-old Anglo in a decade must rank as one of the business achievements of our generation. His whole philosophy of management seems to be different: Anglo managers seem to manage the assets; Davis manages the company. Davis achieved this remarkable feat the usual way; buying cheap and taking the implicit punt on the future of commodity prices. Perhaps he just had less to lose, but his spending spree was well timed. Critically, it was also unemotional, and he turned potential seller at the commodity price peak.
Davis's acquisitive spree has attracted like-minded shareholders, too, who backed the company in the upturn, but dumped it in the downturn, and who are now coming back strongly, attracted by his play-maker style. And now, he has to decide whether or not to make his most critical play. Timing, as always, is critical. Carroll and the Anglo board have just made one clear misstep, deciding to pass on the dividend. Anglo, which paid dividends through the Great Depression and the Second World War, suddenly got the jitters at the crisis -- and its conservative, steady shareholders are miffed now.
Xstrata did the opposite; fantastically diluting its shareholders through a capital-raising exercise and also suspending its dividend. But, weirdly, it worked. Shareholders might have been diluted, but the capital raising had the effect of drawing a line under the financial state. Its more aggressive set of shareholders moved on, and Xstrata has rebounded off its lows more impressively than Anglo. So chalk one up to Xstrata on this score.
With the notion of a merger of equals now off the table, Xstrata needs to cough up a premium or walk away. How much could it afford? Influential website BreakingViews cites a Citigroup estimate that the merger could slice out costs with a net present value of 12,5bn and could make a merged Anglo-Xstrata worth over 82bn.
So if Xstrata wanted to achieve a 10% boost for its own shareholders, that would mean its share of the combination would need to be 39,5bn, the website says. That would leave Anglo shareholders with a stake worth 42,9bn, or 26% more than Anglo's market value before the talks surfaced last week, it says. If Davis agrees with those numbers, they could well be just enough to make the bid appealing to Anglo shareholders, in which case he should press the go button, and devil take the hindmost.
Anglo has plenty of ammunition to resist the merger; its assets are more diverse and better quality, and it's clearly already on the right road. But the merged asset mix is appealing, and with commodity prices now rising again, the timing is good. In an odd way, if Xstrata were successful, it would restore Anglo in combination to its previous position at the apex of the mining pile. Let the games begin.
