The independent directors of
The directors add that the offer, which is for US$43.17 per De Beers linked unit, is “in the best interest of shareholders.”
Under the proposed offer, holders of De Beers linked units will receive 0.43 of an Anglo American share, US$14.40 in cash and a final De Beers dividend of US$1 for each linked unit held. The offer, valued at US$43.17 per De Beers linked unit based on an Anglo American share price of US$64.58, represents: a 31% premium to the De Beers share price on Jan. 31, the day before the first cautionary announcement about the pending deal; and a 69% premium to the average share price over the 12-month period ended Jan. 31, 2001.
In addition, holders of linked units will receive an amount equal to the Anglo American final dividend for the year ended Dec. 31, 2000, which Anglo announced will be not less than US$1.20 per share.
Anglo American owns 32.2% of De Beers; the Oppenheimer family, through Central Holdings, has 2.6%; and Debswana Diamond owns 5%. Debswana is a 50-50 joint venture between De Beers and the Botswana government. It operates three low-cost, long-life diamond mines (Jwaneng, Orapa and Letlhakane) that account for 30% of the total world production by carats.
If the takeover bid is successful, De Beers will be wholly owned by DBI, which in turn will be owned 45% by Central Holdings, 45% by Anglo American and 10% by Debswana Diamond. The Oppenheimer family will manage DBI.
Upon completion of the transaction, the 40.8 million Anglo shares to which Anglo American becomes entitled (as a result of its 32.2% holding in De Beers) will be cancelled. Anglo American will then make a bonus issue to its shareholders of three new shares for each existing share then held. Under this deal, public ownership of Anglo will increase to 93% from the current 58%.
“This transaction will achieve a number of our strategic objectives,” states Anthony Trahar, chief executive of Anglo American. “It will eliminate the cross-holding between Anglo American and De Beers, release around US$1 billion in cash, improve transparency in our business and increase our interest in the diamond sector.”
The last two years have been exceptional years for the diamond industry, which have benefited from a strong world economy and a successful 1999 millennium marketing campaign, which spilled forward into 2000. In calendar 2000, De Beers’ own earnings increased by 84% to US$1.29 billion, while headline earnings increased by 137% to US$1.71 billion. DTC sales for the year totalled US$5.67 billion.
All retail markets, with the exception of Japan, showed growth last year. Diamond stockpiles were drawn down by US$924 million, to US$3.06 billion. Operations generated cash flow of US$2.24 billion, or US$5.60 per share.
The performance of De Beers linked units has been another matter. The average price of the linked units in 2000 was US$25.55, at one point dipping below the US$19 level recorded last April, when De Beers was having particularly large sights as the diamond industry re-stocked after the millennium sales.
“The historical undervaluation of our diamond business has persisted,” says De Beers Managing Director Gary Ralfe. “I think most analysts were saying that the De Beers diamond business was actually for nothing, that the value of our Anglo American shares was as much as the whole market cap of De Beers.”
Explains De Beers Executive Chairman Nicky Oppenheimer, who is also chairman of DBI: “There is obviously a problem. The De Beers company is not properly appreciated in the market.”
The most negatively viewed inhibitor is the crossed shareholdings: De Beers owns 35.4% of Anglo American, which in turn owns 32.2% of De Beers. The cross-holding reduces transparency, liquidity and accountability.
Oppenheimer also believes De Beers’ share price is held back by the complicated structure of its linked units. In addition, he says investors have discounted the company’s South African base, and its problem with the U.S. Department of Justice.
Ralfe adds that there must be some skepticism in the market, “whether our brave words about turning from being custodian of the market to supplier of choice will actually bear results.”
Oppenheimer is convinced that the right way to give shareholders full and fair value would be to take the De Beers company private. “It would give them certainty at the time when the diamond business is at the peak of its cycle and would resolve all the inhibitors,” he says.
The cash part of the proposed deal attributes a value of US$8.3 billion for the diamond business, representing a premium of 78% to the implied value just prior to the first cautionary announcement, and a premium of 169% to the average implied value over 12 months. “We therefore believe this is a very attractive price,” says Ralfe.
The deal allows investors to maintain an exposure to the diamond business through Anglo American’s 45% ownership of DBI.
In order to finance this deal, DBI will raise US$2.6 billion through the sale of equity to the three partners. The Oppenheimer family’s 45% share of DBI is costing them US$1.2 billion, which will be funded by part of their Anglo American stake and their current interest in De Beers. As a result, the family’s interest in Anglo American will decline to 5.1%.
In addition, Anglo American and Debswana will subscribe to US$857 million worth of 10-year, 10% cumulative redeemable preference shares in DBI. On top of that, international banks (Dresdner Bank Luxembourg and UBS) have agreed to underwrite senior credit facilities of an amount no greater than US$3.3 billion, with a maturity of five years, as well as a revolving credit facility of US$1 billion.
The DBI bid has received South African Reserve Bank approval. Consequently, this deal will require approval by independent De Beers linked unit holders, Anglo American shareholders and the High Court of South Africa, together with other regulatory and tax authorities. Oppenheimer hopes to be able to complete the deal by the middle of the year.
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