While the sale of the iconic Be Beers diamond conglomerate to Anglo American did not take industry watchers by surprise, the deal making revealed outstanding business shrewdness by Botswana.
The news of De Beers sale to Anglo American was dramatic but, in truth, not the biggest surprise for the region’s mining and financial community. The market had been wired with rumour for months and De Beers had done little to quieten the gossip mill, spicing the issue by selling a clutch of prime South African diamond mines that included the glamour properties of Kimberley and Cullinan.
At more or less the same time the Oppenheimer family, owners of the diamond giant, were also disposing of much of their shareholding in mining giant Anglo American. Not long ago the Oppenheimers owned some 8% of it; this has dwindled to less than 2% today with the family offloading Anglo scrip mostly to Chinese buyers. The De Beers shareholding (until its sale to Anglo is formalised in the middle of 2012) is Anglo 45%, Oppenheimer family 40% with 15% held by the Botswana government. Why did the Oppenheimers choose this moment to sell, and why so cheaply? After all, the diamond business had begun a stellar recovery from a torrid spell during the 2008/09 recession. The price fetched for Oppenheimer’s 40% was considered a bargain by market watchers. Leading diamond analyst, Royal Bank of Canada’s Des Kilalea, said “the price agreed is some 30% below our valuation”. Other estimates put the market price even higher.
“What is important to realise,” says Tel Aviv-based diamond industry analyst Chaim Even-Zohar, “is that Botswana’s clever contract renewal negotiations limited the Oppenheimer’s options.”
Botswana plays the market
The government of Botswana had been keeping a quiet eye on the Oppenheimers’ disposal of their Anglo shares, alert to the persistent market buzz that they could be contemplating an exit from the diamond business. Why the interest?
“The last thing Botswana wanted was to take the risk that it suddenly would have a Chinese partner,” reports Even-Zohar. “It needed to put in safeguards. It wanted to use its 15% stake as leverage to control its diamond future.” Coincidentally, Botswana’s marketing agreement with De Beers was up for renegotiation around the same time the Oppenheimers were preparing to announce their interest of quitting the business.
The talks were under way in early 2011 with De Beers’ Diamond Trading Company CEO Varda Shine and her team fine-tuning the renewal of the 10-year contract that bound De Beers and the Botswana government, when they ground to a halt. The signing should have been routine, but it was delayed again and again around one persistent sticking point – a single clause insisted on by Botswana that would allow it to renegotiate the contract if there was a change in shareholding.
Both Anglo American and the Oppenheimer family’s Central Holding Company dug in their heels. Botswana wouldn’t budge – well aware it held the ace of trumps: the enormously valuable 10-year bankable marketing contract. The players all knew that a package of De Beers’ shares is worth far more with a lengthy guaranteed diamond off-take agreement with Botswana, than without it. Being the world’s biggest producer of gem-quality stones made Botswana’s case iron-clad. In the end a Botswana-led shareholders’ compromise was arrived at which specified that the contract would not be renegotiable if the shareholding changed among the existing shareholders.
“This had dramatic financial consequences for the Oppenheimers,” says Even-Zohar, “delivering optimum value if their shares were sold either to Anglo American or to Botswana, or both. Selling to a third party became a lesser option. The Botswana government had used its leverage skilfully and denied the Oppenheimers the opportunity to shop around.”
News and details of the sale were presented in glossy wrapping. Nicky Oppenheimer told staff and clients that “if we were ever to sell our stake in De Beers, Anglo American was always going to be its natural home as they have been major shareholders in De Beers since 1926 and have a good knowledge of the diamond business”.
The agreement allows Botswana to exercise its pre-emptive rights and increase its own shareholding to 25%, leaving Anglo with 75%. In a statement, the Botswana government says that “this option will be explored in the coming months”, letting it be known that it was in no rush.
In terms of the agreement Botswana can make the final decision on whether or not to buy any time before the deal is actually closed in the middle of next year.
“This gives Botswana the opportunity of buying at a reasonable price, but it will still need $1.3bn in cash to do so,” observes the Israeli analyst. “When, in mid-November, the Anglo American chairman and Nicky Oppenheimer visited Botswana to inform President Ian Khama of the deal, the Botswana president had reason to be satisfied. The one clause that had held up the marketing agreement for such a long time had paid off. Never before had the country exercised the amount of leverage and influence on a De Beers share transaction.”
In the final analysis, however, Anglo American is the real winner. Prior to the sale it had a 45% holding it wasn’t managing. The stake was not consolidated on its balance sheet and it could not use its shareholding as collateral to reduce its financing costs. That all changed thanks to the final text of the Botswana agreement, providing as it did the opportunity to buy the Oppenheimer family stake at a reasonable price.
“What a difference one clause in a marketing contract can make,” reflects Even-Zohar.