The merger of two companies is a bit like an arranged marriage – not everybody is going to be happy with the choice of partner. The groom’s relatives assume the bride is marrying for money; the bride’s family is convinced she could ‘do better’. But in the end, if pressed, most end up admitting ‘there aren’t too many dance partners out there these days.’
That’s especially true in the mining and minerals industry. With each slice of the commodities industry so tightly controlled by so few companies – some so large they have become, in the words of one analyst, ‘the de facto industry’ – consolidation is often the only growth strategy left. This was the rationale behind the recent merger of Australian mining giant BHP and South Africa’s London-listed Billiton, announced last March 19 and completed just eight weeks later on May 17, a timetable any mother-of-the-bride would balk at.
The proposal
‘At one level the merger proposal was simple,’ says Robert Porter, BHP’s IRO and now vice president of IR at the combined company. ‘It was the formation of a dual listed company (DLC) structure where BHP and Billiton assets would be combined under a commercial agreement. But the mechanics of DLCs were not well understood in Australia. The equalization ratio and other components were difficult for some to get to grips with.’
‘Most of the resistance came out of Australia,’ says Mike Byrne, a Goldman Sachs analyst in Sydney. ‘For institutional investors, if it goes wrong in Australia, it can be a significant part of their portfolio.’
For retail investors, the main questions were where the company would be based, and whether BHP would be swallowed up by Billiton’s more aggressive management style. Often called ‘the Big Australian’, BHP is something of an icon in that country. There was concern about shifting the head office to Billiton’s domiciles, London or South Africa. There was also a real worry – still voiced by some analysts and shareholders in Australia – that the arguments for the merger were ‘really not very compelling’.
‘We don’t see the merger as particularly wealth-enhancing for BHP,’ says David George, an analyst with Deutsche Bank in Sydney. ‘The projects they talked about as being the motivation for linking up with Billiton are not, in our assessment, outstandingly attractive. There are a lot of small assets being brought to the table by Billiton, like some fairly poor standard copper assets. The more attractive contributor to the new group’s earnings from the Billiton side is from the aluminum assets.’
So why did investors agree?
‘When companies get to the point of announcing the merger, they are saying to shareholders that the company desperately needs it,’ says George. ‘The ramifications of it not being voted in are obviously negative for the share price. They are sort of backed into a corner.’
Not so, says Byrne. ‘Certainly the do nothing scenario is less appetizing than agreeing to the merger,’ he says. ‘But the problem with BHP is that once companies in this industry become very big, it makes it difficult for them to grow meaningfully. The [merger] thesis is that you bring together cash-rich and project-rich companies.’
Byrne observes the ‘shelves are becoming bare’ for quality listed assets. ‘If BHP missed this one, they’d be running out of targets,’ he says. ‘And it has brought very observable benefits. In any given six-month period, BHP Billiton will have two, three or four new projects making debut financial contributions. This is not observable in any other mining company around the world.’
It was certainly a compelling enough argument for investors outside Australia. BHP Billiton’s South Africa-based VP of investor and media relations, Michael Campbell, observes there was ‘a very different response in South Africa’ to the merger announcement.
‘Billiton is a relatively large company in southern Africa, so it was not seen as a bad news situation,’ Campbell says. ‘The merged entity would be the second largest commodity company – second only to Alcoa. It was like a South African company had grown up to be a global entity. Meanwhile, the UK side looked at whether the deal made commercial sense, and concentrated on the financial aspects. They wanted a comfort level that the sums would stack up.’
Regardless of whether or not the future of the company is as rosy as the newly-weds would like to think, clearly there was a lot at stake. ‘I remember a couple of institutional investors asking Paul [Anderson, BHP CEO] what the fallback was if shareholders didn’t approve the merger,’ says Porter. ‘I think he said a bottle of scotch.’
Indeed, the companies had in place a ‘pre-nuptial’ agreement in the form of a ‘jilting’ fee of US$100 mn, in case the deal fell through.
One concern was the ‘very real threat’ of a third party incursion. ‘There is a very small number of large, quality players,’ says Porter. ‘There was always a threat that with us announcing the merger, someone would come in with an aggressive cash bid.’
The engagement
Once the merger was announced, both companies had to move quickly to allay any investor concerns. The level of the merger premium had to be addressed, and answers given as to whether this deal was in the best interests of BHP (or Billiton) shareholders. Perhaps inevitably, neither side felt they were getting a great deal.
‘The major issues from UK shareholders was that they didn’t think the premium was significant enough from a Billiton point of view; of course BHP shareholders thought the premium was too high,’ says Porter. ‘Associated with this were questions around the valuation methodologies used, and things were made difficult by UK takeover regulations which meant that forward-looking statements were restricted. Also, there was no independent expert’s report – a matter of some discussion,’ he says.
Porter lists the complaints: ‘We had everything: nationalistic considerations, concerns about how long BHP would remain Australian, concerns that we were being done over by some sharp foreigners. We had a range of stakeholders – unions, government, regulators, so-called corporate governance experts – all with informed views that the media were more than happy to listen to in intricate detail.’
The two companies crafted a consistent message, which Porter believes was crucial. For instance, one critical institution had several meetings with senior management. ‘They didn’t like the answers they got to some of their questions,’ Porter recalls, ‘but they at least got a consistent response; I think that did our credibility a lot of good.’
A key to wooing shareholders, says Campbell, was to come in hard and fast with the ‘good news’ story. ‘To make it happen effectively, you have to arrive with a bang,’ he says. ‘The initial reaction has to be positive. If you have a wobbly start it’s harder. We looked at how others had done it, how they had made the announcement, and looked at where they had failed. We did our homework.’
Tactics included a dedicated web site to keep shareholders, especially the retail side, appraised of developments during the merger process, including a list of frequently asked questions. An initial announcement on the rationale for the merger and a presentation were made via a webcast, which was repeated later on the same day in London.
A document, which Campbell admits in retrospect may have been ‘a bit too weighty’ with its 17-page executive summary, was provided with this presentation. And two shareholder letters were sent, the second more detailed and containing commodity assumptions for the valuation process.
Members of both management teams attended many individual and group institutional meetings, embarking on roadshows in the UK, mainland Europe and the US. There were international site visits to Billiton mines in southern Africa and Latin America; meetings and briefings for retail client advisors at brokerage firms and with the Australian Shareholders’ Association; and a series of letters, queries and in some cases meetings with retail holders. All this took place over eight weeks until proxies were due.
The honeymoon
In the end, the three main merger resolutions received an average vote in favor of just under 88 percent, comfortably in excess of the 75 percent level required.
‘Now people want to be assured that the merger will be completed effectively,’ says Porter. ‘The market will want to see the company efficiently deploying capital, committing to good quality projects, and making progress in capturing merger benefits.’
In Australia, at least, the newly merged company is getting rave reviews. At the Investor Relations magazine Australia Awards in September, BHP Billiton won the Grand Prix for best overall IR and the award for best IR to the retail shareholder, while Porter was a close runner-up for best IRO. That would indicate that the Big Australian’s new South African spouse has received a very warm welcome to the family.
