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Not quite forever

4 November 2011 By Quentin Webb

Taking full control of the world’s top diamond producer will add extra polish to Anglo American. The miner’s agreement to buy the Oppenheimer family out of De Beers was rewarded with a 1 billion pound ($1.6 billion) boost to its market cap on Nov. 4. At $5.1 billion, the price tag seems reasonable. But there’s more to the share-price boost: the deal is also another step towards a more straightforward Anglo – making it a more attractive merger partner.

Anglo will take its holding in De Beers from 45 percent to 75-85 percent, depending on whether the diamond miner’s third shareholder, the government of Botswana, exercises its rights to buy a quarter of the Oppenheimer stake. Factoring in about $1.1 billion of debt, the deal gives De Beers an enterprise value of at least $13.8 billion, or about 5.9 times this year’s EBITDA, assuming EBITDA in the second half matches the $1.18 billion made in the first.

European metals and mining firms trade at about 5.2 times forward EBITDA, but De Beers surely merits a big premium, since it has as much in common with, say, jeweller Tiffany’s (trading on 11.9 times) as a steelmaker. And like so many other deals, this one is partly predicated on China’s rising wealth: a bigger middle class equals more brides demanding diamond rings.

Anglo should also be able to save on central costs and procurement, and share more mining know-how. Some investors are doubtless also relieved at this sensible use of cash, coming just as the company prepares for an unwelcome multi-billion-dollar windfall in Chile, where the state’s copper giant is exercising an option to muscle into Anglo’s operations.

It fits well with Anglo’s long-running move to simplify itself, with $3.3 billion of divestments of late in areas such as zinc. And the more straightforward Anglo gets, the more attractive it could be if, say, rebuffed suitor Xstrata ever decided to make another pitch at a merger or takeover.

The Oppenheimers will plough the proceeds into new Africa-focused investments outside diamonds. For them, diamonds were not quite forever. But Ernest Oppenheimer’s involvement in the industry began in 1902. A century and a decade is good enough going.


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