By Susan Bell The merger of BHP and Billiton will turn two great pretenders into a potentially wo...
By Susan Bell
The merger of BHP and Billiton will turn two great pretenders into a potentially world beating company.
American Paul Anderson took over at BHP in 1998. He inherited a weakened, discredited group groaning under the weight of underperforming assets and a history of spending too much money for too little return. Problem areas included the spectacular underperformance of the US Magma Copper assets, which BHP wildly overpaid for only days before the Sumitomo scandal; the costly, malfunctioning hot briquetted iron plant in Western Australia; and a mineral sands project in Western Australia that was bleeding money faster than the mining slurry was leaching back into the pit.
Billiton, on the other hand, was the industrial minerals arm spun out of South African miner Gencor in 1997. Since its debut on the London Stock Exchange it had struggled for a place in the sun next to the other big diversified miners, Anglo American and Rio Tinto. It was only in the past 12 months that it began to be looked at seriously by the City with its purchase of Canadian group Rio Algom and its clever backdoor move to gain a foothold in Brazilian iron ore giant CVRD.
In the past two years BHP has enjoyed a share price jump of 95% from A$10.47 to A$20.30 as Anderson nipped, tucked and tightened the group's portfolio but investors were next looking for the future earnings pipeline and finding that it promised only a trickle.
Billiton has been buying up assets madly and in doing so stretched the balance sheet so far that as, one analyst put it "it would have to build, own and manage its own projects rather than buy new ones".
Both companies were beginning to look like sitting ducks in an increasingly acquisitive market that had seen the big boys more than willing to fight it out to get the assets they wanted. Witness Rio Tinto and Anglo American's tussle over Australian diversified miner North as well as Rio and De Beers' head to head for part ownership of the world's biggest diamond mine, Ashton Mining.
The $11.6bn purchase of Billiton by BHP in a "merger of equals" solves many problems. The new company would be of a size to effectively put it out of the takeover target market, Billiton would get some balance sheet strength and BHP suddenly had a rather showy list of at least seven to eight new projects.
As of 16 March, the market value of the combined entity was $28bn, second only to Alcoa in the world, with an enterprise value of $35bn. It is market leader or near market leader in aluminium, coking coal (used in steel production), steaming coal (electricity production), copper, iron ore and titanium minerals. Its portfolio would also include oil, gas, nickel and diamonds.
Anderson will remain with the group until the end of 2002, ensuring he leaves having achieved his goal of saving BHP, and Billiton chief executive Brian Gilbertson will take over, crowning an already glittering career.
The dark clouds threatening this sunny horizon come from two directions whether BHP shareholders will agree and whether another predator will appear to take a swipe at Billiton.
On 19 March, BHP shares dropped 5% amid fears that BHP was repeating history and writing blank cheques for assets.
Although there is concern on this front, most analysts thought it was unlikely to hold up the deal.
Second, rumours that Anglo American might launch a counter-bid, though not ruled out, were viewed as unlikely. Anglo is bedding down the De Beers deal and there are plenty more assets out there left for it to buy.
Strategically Billiton would give Anglo too many assets in Southern Africa, a region it is trying to diversify away from.
The deal would be a tremendous step forward for both Billiton and BHP. It is a great strategic fit and would provide protection from any further takeover, securing the group's future as a major diversified player. The merger would give the muscle to buy middle-size assets more easily.The most important next step is to take a leaf from Rio Tinto's book. This perennial class act has concentrated on protecting the value of its assets and ensuring a decent return on capital. This is a lesson the rest of the industry has taken some time to learn but that the new BHP Billiton would be well advised to follow.