ANIL Agarwal, chairman of Vedanta, is to buy a £2bn stake in Anglo American which will make him the second largest shareholder in the UK-listed firm with a 13% stake equal to some 167 million shares.
The transaction will be conducted through Volcan Investments, the majority shareholder in Vedanta, but would not proceed to a full takeover of the UK listed firm.
Said Vedanta in a statement last night: “The company confirms that the proposed investment is being made by Volcan alone, and that the company is not participating in Volcan’s investment”.
“Vedanta is committed to its strategic priorities, including ramping up production from its portfolio of low cost assets, increasing its free cash flow, and continuing to optimise and deleverage its balance sheet,” it said.
According to a report by Bloomberg News, the transaction will be funded through a mandatory exchangeable bond issued by his holding company Volcan Investments Ltd. and secured by Anglo’s shares.
“While we have limited visibility at this stage, given no sight of the proposed terms of the mandatory convertible, it looks to us that this is a ‘cash light’ way of renting a decent voting block in Anglo,” said James Oberholzer, an analyst for Macquarie in a note.
It is understood that most of the shares were priced and allocated overnight. Roughly 12% to 15% of the total £2bn in Anglo shares will be bought from the open market over the next two weeks.
Shares in Anglo American were 6.7% higher on the Johannesburg Stock Exchange in mid-morning trade that was bullish for all the diversified mining houses with Glencore 2.7% higher, while South32 was 4.5% higher. BHP Billiton closed 3.7% higher on the Australian Stock Exchange.
In essence, the structure of the offer is that Volcan will sell convertible share to investors in a specialised secondary market who would then take short positions in Anglo of up to 85% of their original investment.
The convertible is secured by Anglo shares. The coupon rate payable on the mandatory convertible is 4.12%. The convertibles are mandatory because there isn’t an option of converting them to cash.
Anglo American’s top seven shareholders control about 39.5% of the firm including the Public Investment Corporation (PIC) which is Anglo’s largest shareholder with a 14.5% stake. “Volcan is likely to have significant influence on any potential upcoming votes,” said Oberholzer.
Agarwal told Miningmx in February that he hadn’t entirely given up the notion of combining his group’s Hindustan Zinc with Anglo American which he said was “a transaction that needs to be digested”.
He added at the time, however, that Vedanta had been “cooking on cold water” in respect of the transaction after Anglo declined to take the discussions further once being approached by Agarwal last year.
Bloomberg News first reported Agarwal’s public confirmation of the deal in an interview at the World Economic Forum in Davos in January in which he said the combination made sense. Said Agarwal in an interview with Miningmx on the sidelines of the Mining Indaba conference in Cape Town: “The proposal went to the board but it was not the appropriate time. It was just an idea; a very friendly one”.
“It gives him an extremely good seat at the table if there is going to be any corporate activity,” Jeremy Wrathall, head of mining research at Investec told Bloomberg News. “We expect that M&A is going to be the next phase and maybe this is firing the starting gun,” he said.
JPMorgan Chase & Company is acting as the sole bookrunner and underwriter on the financing as well as the coupon guarantor. Volcan plans to place the bond on or around April 11, the statement said.
Given the statement of no intent to pursue a takeover, Rule 2.8 of the UK Takeover Code applies and neither Volcan nor its related parties can pursue a takeover of Anglo for at least six months.