Commodities

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Indian mining billionaire Anil Agarwal wins a gold star for boldness. His timing? "Could do better."

During the depths of the mining industry's debt panic in January 2016, a 2 billion pound ($2.5 billion) investment in London-listed Anglo American Plc would have secured him more than two-thirds of the stock.

Today, after a commodity price rebound and Anglo’s deleveraging efforts, it gets Agarwal’s family trust, Volcan Investments, about 13 percent of the company.

It's hard to read the tea leaves. But the stock purchase might well shake the Anglo board into contemplating more radical action -- the mining equivalent of Kraft Heinz Co's move on Unilever Plc. Anglo shares surged 9 percent.

Agarwal’s statement, stressing that Anglo is an excellent company with good management, was straight from the Warren Buffett school of cuddly capitalism. Putting aside the niceties, it seems like preparation for more aggressive corporate activism.

Consider the deal structure. By acquiring the shares using a mandatory exchangeable bond, Agarwal gets a big chunk of Anglo stock for 36 months without a big cash outlay. 

Think of it like renting, but with benefits. If I tried to simply borrow shares in the market, I wouldn't get on the register or be able to vote at annual meetings. But using the convertible will put Volcan on the register. So Agarwal can try to secure an Anglo board seat, or apply pressure in other ways, perhaps for a sale or break-up. If M&A speculation pushes up the Anglo share price, so much the better for Agarwal.

Anglo is in better shape these days, but it's not top of the class. Despite jumping 160 percent in the past year, it trades on a modest 7.5 times estimated earnings, a fraction above book value.

Agarwal clearly believes Anglo and his mining companies -- including Vendanta Resources Plc and listed subsidiary Hindustan Zinc Ltd --  should be tied together. Anglo rebuffed an approach last year.

A full-blown deal would stretch Vedanta. Anglo's market value is seven times bigger. Yet, oddly, Hindustan Zinc has a similar value. For now, Agarwal says he's not planning a bid, and is forbidden from doing so for at least six months under U.K. takeover rules.

Big Prize
Anglo American's market value dwarfs Vedanta but not Hindustan Zinc
Source: Bloomberg
Volcan Investments (Agarwal's trust) owns 69% of Vedanta. Vedanta owns 65% of Hindustan Zinc

There are other pressure points he can push. A year ago, Anglo CEO Mark Cutifani said he would dramatically slim down the diversified miner to focus on three commodities: platinum, diamonds and copper. Today, his strategy is more confusing. Cutifani has scaled back asset sales because commodities such as iron ore and coal are suddenly throwing off more cash. While it's possible he's still open to a deal involving South African assets, including the Kumba iron ore mine, he hasn't been under pressure to sell.

Could Agarwal, who's keen on African mining assets, hurry things up? Possibly.

Former Anglo boss Cynthia Carroll is an adviser to Vedanta. Chairman John Parker will step down this year, creating a potential moment of vulnerability. Hindustan Zinc has a large net cash position. Its clean balance sheet might help persuade the South African government, owner of almost 15 per cent of Anglo shares, that it's a credible buyer, according to Bernstein Research. 

Many Anglo investors would welcome the company cutting back in South Africa, which accounts for about 40 percent of Ebitda according to Credit Suisse. National politics and labor strife are a constant problem. But stripped of its South African assets, Anglo would be even more vulnerable to a predator.

By putting so much into play, Agarwal has moved shrewdly. He has at least three years in the box seat.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. After three years Volcan can either deliver the shares, or retain them and pay cash.

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

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James Boxell at jboxell@bloomberg.net