Tread carefully when a big miner controls your most valuable commodity
Late last week Anglo American plc announced it has reached an agreement with the Oppenheimer family holding company, CHL (Central Holdings Limited), to acquire its entire shareholding in De Beers Société Anonyme (DBsa), the diamond conglomerate that usually goes under the designation The De Beers Family of Companies.
AA plc already controls DBsa through its 45% shareholding. CHL holds 40% and the Botswana government enjoys the luxury of being a minority but significant shareholder at 15%. So, in a sense, this agreement may only constitute a consolidation of Anglo’s position in a company in which it is the dominant shareholder. Whether or not there exists a management agreement that ensures the Oppenheimer family’s control of DBsa is anybody’s guess, but it definitely looks like it from the outside.
Not so many years ago, De Beers was a listed entity, same as Anglo. During this time (actually for many years prior), De Beers and Anglo had a cross-shareholding of 43% either way, if I remember correctly. So the listed De Beers owned 43% of the listed Anglo and vice versa, the listed Anglo held 43% in the listed De Beers. This may sound like a bowl of financial spaghetti and I suppose, in a sense, it was. I have never met an analyst that could explain this cross shareholding to me as it was fairly obvious that both entities then were controlled by the Oppenheimer family.
So in the absence of rational analysis I had to draw my own conclusions. The first and most obvious explanation is that the cross-shareholding arrangement may offer both companies some room in which to manoeuvre when it comes to tax. But this is such a lame view, I do not attach much value to it. Listed entities are so closely regulated, there is no way they can move profits or losses for a more favourable tax assessment.
The cross-shareholding may have been a strategic way of risk distribution. At times when the commodities mined by Anglo came under pressure, one could assume that there will be some relief from the diamond mining, selling and beneficiation side. And then, when diamonds came under pressure, the other commodities may bring some relief. As I said, this is just speculation.
Then there was a very important international link. The De Beers board was in its entirety cited in the United States for contempt of court, and were actually at one stage, declared Personae non Gratae. This stemmed from an antitrust case based on competition legislation which the board chose to ignore – both the legislation and the summons to appear. This created an almost impossible conundrum for the De Beers board since the USA is unmistakeably, De Beers’ most important market, and very significant diamond companies like the Tempelsman empire, had to find ways to deal with De Beers without directly dealing with the De Beers board. Imagine the logistics of a meeting. It was also after this event that De Beers realised it needed to lessen its dependence on the American market, and it started campaigning in Asia in a very big way.
In the meantime, CHL decided it no longer wants other investors to share in its prosperity, so it decided to delist De Beers and became a private company, based in Luxembourg. But the floated shareholding was relatively small – less than 20%. There was a special shareholders meeting in Johannesburg and an offer was made. I cannot remember all the nitty gritty of this offer but the process culminated in the Oppenheimer family fully controlling De Beers, delisting it, and then inviting the Botswana government as a 15% private equity partner. That is where the current De Beers structure comes from.
So when Anglo plc announced last week it will acquire the 40% CHL shareholding in DBsa, it raised some questions in my mind which has always been there since I started tracking Anglo some 20 years ago.
I do not know what the strategic reason is for Anglo to take over the CHL shareholding, I can see none. I do not know if CHL still has a 43% shareholding in Anglo plc but I suppose one can go and research that in the share register of the London Stock Exchange.
What I do know is that if Anglo takes over almost all of DBsa, then effectively they become our government’s new partner in Namdeb, and the Diamond Commissioner, not so ably assisted by government people, will face a much tougher crowd opposite the table when they negotiate any and all Namdeb agreements. Anglo will also become the management as well as the technical partner in Debmarine, and how that will pan out, remains to be seen.
On the financial side Anglo constitutes about half of the market capitalisation of the NSX. Perhaps the only positive thing I can say at this stage is that this deal will effectively, but in a round about way, bring De Beers back to the Namibian Stock Exchange.