Another FTSE 100 takeover approach. But I’m saying ‘no’!

Anglo American, the FTSE 100 mining giant, has rejected a recent takeover approach. I’m a shareholder in the company and I agree with this decision.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Anglo American plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

On 25 April, Anglo American (LSE:AAL), the third largest mining company in the FTSE 100, announced it had received a takeover approach from its rival, BHP. The press release didn’t contain any numbers but it did explain that the deal would require shares in its unlisted platinum and iron ore businesses to be given to existing shareholders.

However, 36 minutes later, the potential acquirer put some flesh on the bones. It said the deal valued the target at £31.1bn.

Anglo American’s shares closed the day 16% higher, giving the company a market-cap of £34.2bn. This ended a disappointing run for the company’s stock price which had seen it lose 13% in the 12 months prior to the announcement.

The next day, the company rejected the offer claiming that it “significantly undervalues” its business and its future prospects. Its directors also claimed that the restructuring of the group would carry “significant execution risk”.

Spurning BHP’s approach had little impact on its share price, suggesting that shareholders think there might be an improved offer in the pipeline.

I’m one of them. That’s because I agree with the board’s assessment that the bid undervalues the company.

More of an art than a science

Valuing companies, especially in the mining sector, is a tricky business. Commodity prices are volatile which means earnings can fluctuate wildly. It’s therefore difficult to accurately predict profits and come up with a valuation based on earnings.

An asset-based approach is easier. At 31 December 2023, Anglo American had net assets of $31.6bn (£25.2bn at current exchange rates). On the face of it, BHP’s offer’s a fair one.

But in the world of mergers and acquisitions, a company’s enterprise value is frequently used as the basis for valuing them. This is calculated as a company’s market-cap plus debt less cash. That’s because a buyer will have to either take on the borrowings — and repay them over time — or settle them immediately.

Using its December 2023 balance sheet and its current stock market valuation, Anglo American’s enterprise value is £42.8bn. BHP would need to increase its offer by 25% to match this.

Going underground

I also believe it’s possible to justify a higher valuation on the basis of the company’s reserves. Its latest estimate indicates there’s plenty of metals left for it to extract.

In terms of copper alone, it says its mines contain 93,126 thousand tonnes. At current prices that could generate lifetime revenue of over $921bn (£728bn).

But this figure comes with a big health warning. It’s revenue, not earnings. Extracting metals from deep underground is an expensive business — the company’s operating margin was 31% in 2023. The estimate doesn’t reflect the different grades of copper, nor the ownership percentage that the company has of each mine.

And prices can fluctuate. Also, mining’s probably one of the most difficult businesses to get right. The industry faces all sorts of operational, financial and political risks which can help depress valuations.

But despite these caveats, I think there’s plenty of evidence to suggest that BHP’s looking to buy Anglo American on the cheap. Until it comes up with a much more attractive offer, I’d reject any takeover approach.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Anglo American Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

UK investors are piling into Vodafone! Should I buy this FTSE 100 stock?

This ultra-cheap FTSE 100 dividend stock has been very popular among retail investors lately. What might they be seeing in…

Read more »

Market Movers

This FTSE 250 value stock is up 11% today! Here’s what’s going on

Jon Smith explains why a FTSE 250 stalwart is shooting higher today on fresh news and talks through why this…

Read more »

Inflation in newspapers
Investing Articles

£276bn worth of reasons to invest in UK shares?

Our writer prefers investing in UK shares to holding cash. However, he acknowledges that this approach does carry some risks.

Read more »

Investing Articles

Here’s the latest growth and share price forecasts for Nvidia stock

Nvidia is due to report Q4 results towards the end of February. Should I buy the stock in anticipation of…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Is the party over for the S&P 500 as Trump’s tariffs loom?

Donald Trump's planned tariffs have cast doubts on the future performance of the S&P 500. What should investors do now?

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Warren Buffett continues to invest in this well-known pizza company

Warren Buffett just bought another 1.1m shares in Domino’s Pizza. Should investors follow him into the well-known fast food company…

Read more »

Investing Articles

A £100 weekly income from a Stocks and Shares ISA? It’s possible!

Mark Hartley details how a combination of good stock picks and patience could transform a Stocks and Shares ISA into…

Read more »

Young black colleagues high-fiving each other at work
US Stock

Why Apple stock could be set to soar with the new Alibaba partnership

Jon Smith explains why a new deal relating to the Chinese market could be good news for Apple stock, not…

Read more »