It was the lists produced by banks and stockbrokers, coupled with Xstrata’s “marriage of equals” raid on Anglo American, which set off a loud warning signal that the money men are moving back into the mining sector.
In principle, there is nothing wrong with the return of the bankers – the mining industry needs them to grease the wheels and raise capital for exploration and development. The return of money is also a positive sign that some of the green shoots of recovery are more than weeds on a mullock dump.
But after a year on starvation rations, there is a real danger that the deal-makers will not be thinking about the health of the mining companies they’re targeting. They will only be interested in orchestrating a feed for themselves.
What this means is that so-called “perfect fits” might not be perfect at all. They might simply be the bits that a banker can stitch together, before peeling off his fees and disappearing in the night as the merged business he has helped create crumbles.
If this sounds unfair, consider what happened at Rio Tinto when the money men convinced a weak management team fretting about a possible BHP Billiton bid that a deal with Alcan was the solution.
What an absolute disaster. Rio Tinto and Alcan were oil and water, especially as the deal itself involved a vast and indigestible load of debt.
Loading up their victims (sorry, clients) with debt is standard operating procedure for bankers because every dollar borrowed means higher fees for them.
Not looking closely at how management cultures fit is another classic mistake of the bankers who believe that all management teams can be bashed into shape – which, of course, they can’t.
That’s what makes the Xstrata-Anglo deal so interesting. Not only is it the first of what might be a bumper merger season, but it proposes to force two totally different management cultures into the same operating environment.
Anglo American is a business bogged down by decades of bureaucratic fumbling, indecision, and with a large proportion of its asset base trapped in South Africa where government has always had an excessive say in how companies operate.
Xstrata, on the other hand, is not really a mining company at all. It is an accounting creation, forged by a merry band of clever commodity traders and Swiss bankers, who spotted the start of the China-driven commodities boom.
Their very successful method of operation is all about deal-making.
The sequence of events goes like this: buy, strip, consume – and then look for the next target using the funds liberated by stripping an asset (plus a fair dollop of cash).
Anglo American just happens to be the next target, ripe for the picking and, if not, then perhaps Anglo American can be enticed to buy Xstrata itself.
The point being made by Dryblower is that through the eyes of Xstrata, and the investment bankers of the world, the mining process is utterly irrelevant. It’s all about deal flow and fee generation.
Hammering Newcrest Mining and Lihir Gold together is one of the deals being floated yesterday.
Perhaps it will work – after all, they’re both gold miners. But if it doesn’t and the merged entity is stuffed to the gunwales with debt, with the two management teams tearing each other apart, will the bankers who forged the deal give a fiddler’s? Not likely.
BHP Billiton and Woodside Petroleum is another thorny annual. While BHP Billiton can afford to do a deal, it will have to pay a hefty premium to shake Shell off the Woodside share register, almost certainly paying too much for the pleasure of doing business together.
The top end of town is not the only sector of the market being targeted by the bankers because right now they can lay their hands on ridiculously cheap debt, courtesy of the many government economic stimulus plans, which have driven interest rates down to near zero.
For a banker, there is a near-perfect storm brewing. It consists of low interest rates, surplus capital, signs of economic recovery, hints of rising commodity prices and desperation to do a deal, at whatever cost, and no matter who it hurts.
*Dryblower is a weekly column on ILN’s sister publication MiningNews.net.
