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Digging into Anil Agarwal’s £2bn Anglo American bet

Neil Hume, Joseph Cotterill and Amy Kazmin
Anil Agarwal, billionaire and owner of Vedanta Resources, pauses during a presentation in Cape Town, South Africa, on Tuesday, Feb. 7, 2017.
Halden Krog | Bloomberg | Getty Images

During a dramatic ascent from small-town metals merchant to Indian mining tycoon, Anil Agarwal has always had an eye for a deal. But perhaps none as audacious as his attempt to buy £2bn of shares in Anglo American, which will give the self-made billionaire a major say in the future of one of the world's top miners.

The chairman of Vedanta Resources described Wednesday's share swoop on Anglo by his family trust Volcan as just an investment in a "great company with excellent assets", stating that he had no immediate plans to launch a takeover.

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But the complex structure of the transaction, which is being funded by a mandatory exchangeable bond issue, suggest a broader strategic intent, according to analysts and bankers.

Pradip Shah, co-founder of the Indian rating agency CRISIL, who has known Mr Agarwal for more than two decades, says the move on Anglo is entirely in keeping with the billionaire's personality and he should not be underestimated.

"He comes from the boondocks of Patna, and now he wants to be the biggest and the best. It's not even money driving him now."

With Anglo already considering a potential sale of operations in South Africa, if Mr Agarwal is successful in acquiring a 12 per cent stake in the group, this could be used to push for a deal to help long-term ambitions to create a rival to BHP Billiton and Rio Tinto through Vedanta, the resources group controlled by Mr Agarwal.

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Shares in Anglo rose 8 per cent to almost £13 on Thursday — the biggest one-day gain in the stock for eight months. The share acquisition has not yet been completed, but people working on the transaction say it is expected to be finished by early next month.

"We doubt that the firepower exists for a fully blown takeover of Anglo American," says Paul Gait, analyst at Bernstein Research. Anglo is seven times larger than Vedanta.

"We see a more likely motivation as Mr Agarwal striking for a place on the Anglo American board, and therefore . . . to influence corporate activity, including Anglo's attempts to exit a significant chunk of its South African exposure."

Mr Agarwal, whose net worth was recently estimated at $3.2bn by the Hurun Rich List, has amassed a fortune buying bombed out mining assets from the Indian government and transforming their operations.

But people familiar with the billionaire's ambitions say that his dream is to build an Indian version of the world's biggest diversified miners such as BHP Billiton. It is through that lens that his investment in Anglo needs to be seen, say analysts.

Rather than using cash to finance his share acquisition, his bankers at JPMorgan are raising £2bn through the sale of mandatory exchangeable bonds. These bonds will be exchanged either for cash or Anglo shares in 2020.

"Basically Agarwal gets his hands on 12 per cent of Anglo for the next three years, in which time he can try and influence the company," says one debt investor. "On top of that he has the option in three years to keep the stock or hand it over to bondholders."

While a 12 per cent stake does not guarantee Mr Agarwal a seat on the Anglo board, it would put him in a powerful position should Anglo decide to sell South African assets. Anglo declined to comment on Mr Agarwal's investment.

"It does appear that Volcan is positioning itself to be in a front-line seat if any break-up of Anglo American were to happen," says Citi analyst Heath Jansen.

After returning to profitability in 2016, Anglo, which celebrates the 100th anniversary of its founding in South Africa this year, has pulled back from a radical shrink-to-survive strategy.

Anglo's chief executive Mark Cutifani says the company no longer needs to make disposals to cut debts and can hang on to assets previously deemed non-core such as its large iron ore and coal mines in South Africa.

But he has been careful not to rule out a deal that would see Anglo sell these assets or spin them off into a new vehicle listed in Johannesburg. Such a move would please many shareholders, who want the company to reduce its exposure to the South Africa because of political and regulatory uncertainty and strict capital controls that prevent cash from leaving the country.

"If someone has a view on how they would like to see something consolidated in South Africa, we are open to the conversation, but I would have to be able to demonstrate to all of our shareholders that it created value," he said after Anglo announced annual results in February.

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For his part, Mr Agarwal has been eyeing a deal with Anglo for some time as he looks to diversify away from India, a market where his relations with government appear to be strained.

He approached the company last year to discuss a range of ideas including a merger with Hindustan Zinc, a Vedanta subsidiary that is developing the giant Gamsberg project in South Africa.

Hindustan Zinc has net cash of $3.8bn, something that could be particularly advantageous in any acquisition of South African assets, says Bernstein's Mr Gait.

Anglo quickly rebuffed his approaches but Mr Agarwal, who has a reputation for getting what he wants, has not seemed unduly concerned. Speaking at the World Economic Forum in January, he said the proposed tie-up would have been a good match, and added that he would not rule out further discussions. He has already bought zinc and copper mines from Anglo in Africa.

"He has already acquired two sets of Anglo assets, so knows what potential may exist within other Anglo assets for cost-cutting," says Barclays analyst Amos Fletcher, noting that Vedanta has also hired Anglo's former chief executive Cynthia Carroll.

"This gives him enhanced insight into the mechanics of the company," adds Mr Fletcher.

But any deal to buy assets in South Africa from Anglo would require not only the blessing of the government but also the Public Investment Corporation, which is a 15 per cent shareholder in Anglo.

With about $120bn assets under management on behalf of South Africa's government employee pension fund, the PIC has been using more of its clout to help stimulate the country's sluggish economic growth.

Having doubled its stake in Anglo shares at the depth of the commodity price crash, the PIC has been pushing the group to create a national champion that could also redress racial inequality in mine ownership.

Last year, the PIC pushed for any asset sales to be put to a shareholder vote. It wants the coal and iron ore mines in South Africa bundled together with some of Anglo's platinum assets to create a large, diversified — as well as homegrown and potentially black-owned — company.

But one drawback so far of creating a big bundled miner out of the Anglo assets has been amassing enough investors given a relative lack of black capital.

Support for a break-up from Mr Agarwal — and his financial firepower — could help clear this hurdle. The PIC said on Thursday that it "will not be expressing a view on this transaction".

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