Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Anil Agarwal's decision to lift his stake in Anglo American Plc last month looked as puzzling as his first investment back in April. The transaction gave the Indian billionaire a big holding in the U.K.-listed miner with limited exposure to the movement of the share price. The pricing of the latest deal means it won't be easy for Agarwal to make a direct profit at all.

To re-cap, Agarwal bought 11 percent six months ago. In late September and early October, he amassed a further 8.5 percent. Both purchases were funded with borrowed money. And both purchases can be reversed in three years' time by using the Anglo shares acquired to pay off the borrowings. If that happens, Agarwal will have effectively rented the stock.

But while the deal could end up being a round trip, it's not a free ride for Agarwal. The borrowing was facilitated by issuing 1.5 billion pounds ($2 billion) of so-called exchangeable bonds. These pay a coupon of 3.875 percent, totaling 174 million pounds over three years.

Self-Fulfilling Prophecy
Anglo shares rallied since Anil Agarwal announced plans to invest $2 billion in September
Source: Bloomberg

Agarwal used the proceeds of the bond issue to buy around 111 million shares at an average price of 13.50 pounds each. Under the terms of the deal, he keeps all of the first 10 percent of the gains from this level. Any further gains go 91 percent to the bondholders, and 9 percent to Agarwal. If the shares rise 10 percent, to 14.85 pounds, he makes 150 million pounds. The shares then need to rise to around 17.30 pounds to make him the remaining 24 million pounds that would cover the cost of those coupon payments.

That level is nearly 30 percent above where Agarwal bought in, and 35 percent above Anglo's closing price the day before he revealed his ambition. It's quite a hurdle to climb just to break even.

He has said this is a family investment, which could mean many things. There are ways it could make sense. Agarwal can settle the bond in cash rather than handing over Anglo shares. in which case he will end up having amassed a massive stake at a price that would probably be lower than if he tried to buy so many shares in the market.

What's more, Anglo trades on 9.7 times forward earnings, against 11 times for Agarwal's Vedanta Resources Plc and 14.5 times for Glencore Plc. The potential for a re-rating may provide some comfort that the shares will rise enough to cover the exchangeable bond's coupon costs.  Anglo stock has already jumped to 14.46 pounds, partly amid speculation that Agarwal has some kind of plan. 

The Value Case
Agarwal's investment in Anglo comes as the miner is seeking to close a valuation discount
Source: Bloomberg
Note: Valuation on share price to forward earnings multiple

Agarwal is a patient man. Even so, the high hurdle to making money will reinforce the impression that this investment is more strategic than financial, and that his best route to a profit is using his influence to nudge Anglo into some kind of favorable M&A.

Peter Grauer, the chairman of Bloomberg LP, is a senior independent non-executive director at Glencore.

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

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Chris Hughes in London at

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