Anglo-American Poisons its South African Well

(Mis)-adventures in political risk

People often use the term ‘political risk’ to mean different things – the three most common of which are, firstly, the risk of government instability, secondly the risk that a government will take action that negatively impacts a business or investors’ interest, and finally the risk that a government will face increased financing costs. It is rare that a single day marks the confluence of all three.

Yet that is precisely what South Africa experienced on 29 May when voters went to the polls and returned a legislature in which the African National Congress (ANC) will not have a majority for the first time since apartheid and mining firm Anglo-American rejected a takeover offer from its larger rival BHP.

South Africa now faces a tense coalition formation period in which the ANC has to choose from one of three parties as a coalition partner – the second-place Democratic Alliance, ex-president Jacob Zuma’s uMkhonto we Sizwe (MK) Party, or the populist radical Economic Freedom Fighters (EFF).

A tie-up with either of latter two would likely be economically disastrous for the country, given Zuma’s legacy of corruption (for which he was banned as standing as a candidate), and the EFF’s demands for widespread nationalisation. A coalition, or confidence and support agreement with the Democratic Alliance, would conversely likely be strongly welcomed by the markets given its relatively good track record governing Africa.

The coalition formation process, however, will be sharply affected by Anglo-American’s actions in fending off the BHP takeover.

Both companies had proposed divesting some assets during their brief merger talks, but Anglo-American called for key assets in South Africa to be spun off after the merger. In the words of the Financial Times, Anglo-American was seeking to use the South African government as a ‘poison pill’ to try and block the merger. But in negotiations it also introduced additional complexity to the deal by calling for the sale of some Australian assets as well.

In contrast, BHP had supported spinning off only Anglo-American’s largest South African assets, Kumbla-Iron Ore and the Anglo-American Platinum subsidiary, better known as Amplats, where Anglo-American announced major jobs in February in the face of repeated union battles and a difficult price environment for the metal. Anglo-American’s actions naturally were not welcomed by the South African government, Anglo-American’s largest individual shareholder, and while it also responded coolly to BHP’s proposal, the plan was presented as a way for Johannesburg to take a larger say in determining the future of its own mining industry. The firm’s non-government South African investors had declared their openness to BHP’s offers in the weeks on 10 May.

BHP’s move – and engagement with South African representatives – was a politically astute move coming on the eve of the elections. Incumbent President and ANC leader Cyril Ramaphosa himself rose from a mine union leader to multi-millionaire status of the back of his Shanduka Group, South Africa's most successful indigenous miner, and also served on the board of fellow platinum miner Lonmin. If the markets could return more control over the future success of the country’s mining industry, this would rebut the logic of the proposal put forward by the radical leader of the EFF, Julius Malema, for the wholesale nationalisation of the country’s platinum mining industry – an act that would have a devastating impact on investor confidence.

Anglo-American may have staved off BHP’s takeover efforts, for now, but it has invited more political risk in South Africa. By failing to agree the merger before the election, the future of the company and how South Africa oversees its Public Investment Corporation’s 7% stake, which Anglo-American’s leadership  actively sought to leverage to reject the deal, will be key questions in the coalition talks.

The tactics employed by Anglo-American to try and cast BHP’s offer as negative for South Africa’s interests risk weighing negatively on the chances for a tie-up between the ANC and the Democratic Alliance, which emerged out of the country’s former apartheid-era parties and is still viewed by man as a ‘white party’. The Democratic Alliance had signalled its openness to allowing market forces to play their course, while also blaming mismanagement and corruption under the ANC for weakening Anglo-American in the first place. Its approach has also opened the door for the MK Party or EFF to prioritise demands about the mining sector if the ANC seeks to partner with them.

Despite its name, Anglo-American was developed as the leading light of South Africa’s mining industry. Since the end of apartheid, returning more of the benefits thereof to South Africans has been a priority for every government. BHP has no such commitment to South Africa, and spun off its own assets in the country in May 2015 into the standalone firm South72. But Anglo-American’s latest action can be seen as once again putting short-term greed over long-term interest. And by looking to the state to serve as a poison pill after killing off the deal it has risked poisoning the well amid country’s fraught post-election political environment.

It is rare that a company invites political risk on itself. To protect itself from a merger that it had been willing to entertain, seems remarkably foolhardy – and highlights to South Africans how managers put their own interests above those of the nation.