Tucked away at the back of the 2020 Budget Review were a series of exchange control updates that included the following: “Approval conditions granted by the minister of finance for corporates with a primary listing offshore, including dual listed structures, will be aligned to the current foreign direct investment criteria and/or conditions to level the playing field.”
As it turned out, the “corporates” involved were just one: Anglo American. It was granted permission to move to London in 1999 subject to a series of conditions, including on moving money. Over the next two decades, SA largely abolished exchange control for foreign companies operating in SA — and the other four companies that had moved to London, subject to similar conditions, disappeared. That left Anglo alone with its old-style excon restrictions — and the group negotiated successfully to level that particular playing field.
SA’s exchange control story is one for another time. But Anglo’s London listing conditions are just one aspect of the regulatory morass that will face BHP if it goes ahead with a formal bid for Anglo. That regulatory weapon could be the most formidable one in Anglo’s arsenal if it doesn’t want BHP at any price — and wants to do its own radical restructure instead.
Complexities
It’s a weapon Anglo already started to trigger, hinting at the complexities of the approvals that would be required and the risk that poses for its shareholders. BHP has promised to work “closely and constructively” with competition regulators. But SA’s competition authorities are not the only ones that will be scrutinising the deal, and bringing a public interest lens to it.
This may be a Melbourne-based company trying to merge with a London-based one. But those 1999 agreements will have required that any change of control at Anglo also had to be approved by the government, over and above the approvals from the taxman, Reserve Bank and finance ministry that any such cross-border deal would require.
What’s left of exchange control focuses largely on protecting SA’s tax base as well as its financial stability and balance of payments. Anglo SA, which holds the group’s SA assets, is still tax resident in SA. The BHP deal would surely change that; it would be closely scrutinised by the tax authorities, who might be particularly sensitive after Naspers’ unbundling of international subsidiary Prosus a couple of years ago prompted some analysts to say the group didn’t pay a fair share of tax on its way out.
Then there are the capital flows that might be involved. Demerging or unbundling Anglo’s 70% of Kumba Iron Ore and 80% of Anglo Platinum, as BHP insists the group do as a precondition of the deal, comes with its own excon issues. Anglo now plans to unbundle the platinum company anyway.
What happens is Anglo distributes all its shares in Amplats to its own shareholders, who then end up holding the platinum shares directly as well as keeping their Anglo shares. But some of those shareholders, especially the foreign shareholders, may not be able to keep their Amplats shares — institutional investors who can only own a company with a primary listing in London or one in the FTSE 100 index, or even those who only invest in diversified miners not single commodity companies.
If getting big deals through SA’s competition authorities is a mission at the best of times, one wonders what it’s going to be like to get this one through.
They will also have to sell their Amplats shares, quite possibly to SA shareholders — hence so-called “flowback” , when wads of cash flow out to pay for those shares. There may be other flows involved too, which the Reserve Bank will need to look at.
Perhaps oddly, though much has been made of mineral resources & energy minister Gwede Mantashe’s opposition to the BHP deal, he is the one regulator who doesn’t have a say, because an exemption in the mining licence rules means that a change of control in the top company does not require a so-called section 11 mining licence approval.
But the minister who really does matter is the minister of trade, industry & competition, now Ebrahim Patel — who has amassed great power to himself under the competition legislation. It’s hard to predict how a new minister might use those after the election, if there is a new minister. But under Patel, the way you get approval for a large merger or takeover, especially a foreign one, is you first have to negotiate with him over any public interest concerns the deal raises, and offer various goodies to address these, often very costly ones, including employee share and BEE schemes as well as localisation funds and big capex commitments.
An interesting question is what happens when the merger is actually a demerger. This sometimes counts as an internal restructure that doesn’t require competition approval; other times it counts as a change of control which does require approval — especially when it’s part of a bigger deal such as BHP’s involving the “inter-conditional execution of two demergers and a takeover”, as Anglo put it.
If getting big deals through SA’s competition authorities is a mission at the best of times, one wonders what it’s going to be like to get this one through, never mind what public interest conditions might be imposed — and who will be expected to comply with them. It is institutions and retail investors taking over after the unbundling so it is not going to be them but Amplats and Kumba that will have to do the employee stock ownership plans and localisation funds and whatever. BHP has indicated it will pay the $2bn of capital gains tax involved; whether it is factored in the full package is unclear.
Will it be easier for Anglo to do its own radical restructure? The group has made much of being closer to SA communities, employees and the government and is more sensitive and responsible. And it may have a better feel for the regulatory craziness. There also might be much less of this. Anglo’s plan doesn’t have it changing control or leaving SA — even though ultimately all that might be left of it here is Kumba.
The point about the regulatory morass is not that SA’s regulators would halt a deal. But it could come with a thick layer of conditions and extra costs. And it could take forever. By the time the regulators are done, platinum or iron ore or copper prices could be radically different. An all-share merger that looked attractive might no longer look good at all. This wouldn’t be the first deal to be sunk by protracted regulation. That might work for Anglo.
Whether it works for SA in the end is a question. A country in need of investment surely cannot afford to make deal-making so difficult.
• Joffe is editor-at-large.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.