When miners get picked off, FTSE is in trouble
A £31bn takeover bid for Anglo American from BHP Billiton risks finishing off the London stock market
The death knell has just sounded for Britain’s public markets. The hollowing out of the UK stock market is far from a new phenomenon and the causes of it are by now painfully well-trodden. This country’s utterly naive “help yourself ” approach to foreign takeovers is a massive part of the problem. It means it is forever open season for opportunistic predators looking for an easy bargain.
Empire builders are further encouraged by the supine nature of so many boards, content to shrug, then roll over, the moment a bidder comes knocking with the requisite mediocre bid premium. Meanwhile, too few UK executives possess the ambition and courage to get on the front foot and go hunting for their own targets.
Amid a seemingly relentless flow of one-way deal traffic, the number of listed companies has been shrinking at an alarming rate.
The exception has been the FTSE 100. By virtue of size, the blue-chip index has remained largely off-limits, and as long as that continued there was some hope that London could cling on to its position as one of the premier stock markets.
A blockbuster £31bn takeover bid for mining giant Anglo American from larger Aussie rival BHP Billiton – itself a refugee from the capital – could be fatal to the London Stock Exchange’s (LSE) prospects. As a bona fide member of the top quartile of Britain’s biggest companies, the disappearance of Anglo into the arms of an overseas competitor would raise the “for sale” sign over the vast majority of corporate Britain.
That would be a dangerous message to send. If acquisitive interlopers think it is open season then they will be emboldened to pounce. Meanwhile, a white flag could be the deciding factor for those thinking of absconding to the US in search of juicier valuations such as Shell, or those that are under pressure to leave for the States, like Ocado.
It would only take a few high-profile exits and London could quickly be doomed to the status of a backwater from which it would be desperately hard to recover – if not impossible.
The air of decay that hangs over the City might be less pungent if the exodus of companies was in some way being countered by a queue of debutantes in the other direction but sadly that just isn’t the case.
Merger and acquisition investment bankers are busy, so too their counterparts operating in the revived debt markets, but the pipeline for new share listings in the UK is so dire, and expected to remain so for some time, that those in equities would do well to take a sabbatical or perhaps even consider a career change.
London has attracted just 2pc of total float volumes in Europe this year, with Zurich and Frankfurt far busier, the latest data show. The Square Mile’s relegation is being blamed on Britain’s lacklustre economy and a perception that better valuations can be achieved on other stock markets around the world.
It would be tempting, as well, to think that the mining industry’s track record when it comes to mega-deals will be enough to persuade both Anglo’s board of directors and its shareholders to run a mile from BHP.
The sector has a long history of eye-watering value destruction through takeovers, with BHP among the worst offenders.
It squandered $750m (£600m) in advisory fees on aborted bids for both Rio Tinto in 2008 and Canada’s Potash Corp in 2010. Yet that was pocket change compared with losses incurred through its ill-timed $20bn foray into the US shale industry in 2012 when crude prices were above $100 a barrel. That dalliance ended in some of the biggest writedowns in its history. And in 2015, the company booked billions in losses when it spun off many of the assets that BHP inherited when it joined forces with Billiton a decade and a half earlier.
Anglo gets a special mention, too, thanks to its disastrous Minas-rio asset in Brazil. The purchase of the iron ore mine in 2007 was the brainchild of Cynthia Carroll, its chief executive at the time, as she sought to reduce the company’s reliance on revenues from South Africa, but it proved to be another of the sector’s costly top-ofthe-market deals. Anglo went on to pour close to $13bn into the project, but by 2015 it was worth close to nothing. Lumbered with the debt taken on to invest in Brazil, the miner was left fighting for its future.
Memories are remarkably short, however, and with Anglo in a rut it may not take much to convince shareholders to sell. With its shares having halved in the past two years, and investors stung by a series of hefty production downgrades in December,
‘It would only take a few high-profile exits and London could be doomed to the status of a backwater’
the board faces an uphill battle to convince them that remaining independent is the best strategy – assuming that the company wants to.
There will be fears that Stuart Chambers, Anglo’s chairman, doesn’t have the stomach for a fight. The 67-year-old was the man who sold UK microchip champion Arm to Japan’s Softbank on the cheap, and from under the nation’s noses, in 2016. The humiliation of surrendering a genuine jewel in our technology crown so easily has been compounded by Arm’s decision to snub its natural home and relist its shares in New York.
The concern for the FTSE is that Anglo is among a cohort of stalwarts that it thought could be depended on to stay and prop up a stock market that financier Paul Marshall has likened to Jurassic Park. But if the dinosaurs start leaving, too, then is London facing an extinction event?
Much will depend David Schwimmer, the LSE boss, who insists the exchange is “very pleased with the direction of travel”. If he isn’t alive to the threat then maybe it’s already too late to save the capital.