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Although the expression “end of an era” is freely bandied around, the decision by South Africa’s Oppenheimer family to sell its 40-percent stake in De Beers to Anglo American for $5.1 billion clearly fits the bill. Although the possibility that the family would sell its holding had been rumoured for some time, the announcement on November 4 caused large ripples of surprise in the diamond industry, marking as it did the end of more than 100 years of involvement for the storied family in the diamond industry.

 

The agreement provides forAnglo American to raise its holding in De Beers to 85 percent from 45 percent, although the Botswana government, which now has a 15-percent stake in De Beers, has the right to take part in the deal and raise its shareholding to 25 percent, which would leave Anglo with 75 percent. If that happens, Botswana will pay a pro rata amount of the $5.1 billion. Anglo has held a share of De Beers since 1926, and has been the largest shareholder in the miner since it delisted in 2001.

 

Anglo will also pay a capped consideration of 20 percent if a relisting of De Beers on a stock exchange occurs within the first year of the acquisition, or 10 percent if a listing takes place in the second year. Although some analysts think a listing is likely because it would give more transparency and enable Anglo to raise capital, it does not appear to be imminent according to Anglo American CEO Cynthia Carroll. She said the firm was interested in De Beers as "things stand right now."

 

The deal is subject to regulatory and government approvals which are likely to take at least nine months, the sides said. From the De Beers' management perspective, Anglo said it would not alter existing arrangements, and that Philippe Mellier, who was only appointed CEO in July, would continue in his role.

 

Anglo's financial chief Rene Medori said the company’s $3.5-billion undrawn facility and $2.2 billion cash available outside of South Africa would be used to fund the deal. And industry analysts were quick to state the benefits of the deal for Anglo American. RBC Capital Markets (RBC) raised its price target recommendation for Anglo American to £38 per share from £36, adding that Anglo is expected to outperform the sector average. Meanwhile, analysts Liberum Capital in London described the deal as "a sparkling purchase. We believe that Anglo has struck a very good deal for itself”.

 

RBC also estimated that the price Anglo American will pay is 25 percent to 30 percent less than De Beers' valuation. And it will not create a financial strain for the multinational corporation, since it has around $4.5 billion in cash and $3.5 billion in debt facilities. Furthermore, although Anglo's net debt at the end of June stood at $6.8 billion, it will receive a substantial sum from Codelco, the National Copper Corporation of Chile, which plans to exercise its option to buy a part of Anglo's Chilean copper unit. Although the amount has not been disclosed, RBC believes the sum to be around $5 billion net of taxes.

"The price of $5.1 billion is probably a little on the cheap side, but for the Oppenheimers there was only one buyer”, said RBC analyst Des Kilalea. “The current ownership structure is a little bit clumsy and this deal will help to clear it up.”

 

RBC also forecasts the deal will add 5-10 percent to Anglo's earnings, and that could even be on the conservative side. With diamond markets recovering and rough diamond prices rising after their slowdown in the summer, there is potential for even larger earnings. Furthermore, RBC said, the acquisition gives Anglo a larger exposure to the diamond sector, where solid fundamentals see prices rising in the coming decade. It also diversifies Anglo’s portfolio compared to its rivals.

 

The deal could also simplify the task of managing the diamond conglomerate. Kilalea pointed out that, in 2009, De Beers sought financing, in part because a wish among the three shareholders to receive dividends, along with ongoing requirements for capital and exploration funding. The sale to Anglo American means that such conflicts should be reduced in future, he said, while its need for exploration funding should also present less of a problem.

 

Meanwhile, De Beers is also seen benefiting from the buyout since it creates a much-reduced reporting arrangement, as long as the company remains delisted, as well as the injection of mining expertise, economies of scale through Anglo's enormous procurement programme, and the likelihood that head office costs can be reduced. In addition, De Beers' capital and exploration funding needs should also be moderated.

 

The Oppenheimer's role in the diamond industry stretches back to the early part of the last century. But it was only in 1927 that Sir Ernest Oppenheimer managed to gain control of De Beers. Sir Ernest also was the founder in 1917 of the Anglo American Corporation of South Africa, along with legendary American financier J.P. Morgan. Thus, the company that the Oppenheimers founded is now taking possession of the company that the Oppenheimers controlled.

 

According to De Beers' Chairman Nicky Oppenheimer the process of selling its stake was a simple and short one. “The answer to why now is because Anglo made us an offer and this has all been done in a very short time, over a sort of three-week period,” he told The Financial Times. “[Anglo American Chairman] Sir John Parker asked me to go and see him and said Anglo wanted to make us an offer and so that’s why now.” He said that it was the first offer De Beers had received for its holding.

 

It is equally clear that Anglo American was the obvious, perhaps the only buyer of the Oppenheimers' stake. "With a diversified portfolio equalled only by their diversity of experience, Anglo American will provide De Beers with the resources necessary to maintain De Beers' leadership position across the diamond pipeline and capture the potential presented by a rapidly changing diamond market," Oppenheimer said.

 

Indeed, a clue as to future intentions is clear in retrospect when Oppenheimer, aged 66, stepped down from the Anglo board last February. He said at the time: “There comes a time when it’s right to stand aside and allow others to carry the baton. For me, that time is now.”

 

Despite the Oppenheimer family's long association with De Beers and diamonds, Nicky Oppenheimer appeared to be taking an unsentimental view of the deal. He said that he and his son Jonathan intend to use the $5.1 billion proceeds to pursue projects in South Africa and across the continent under the name of E Oppenheimer & Son. The family said they regard Africa and South Africa as “exciting places to look at it in terms of business opportunities and we will continue to operate out of Johannesburg”. A restraint clause means Nicky Oppenheimer cannot get back into the diamond industry for two years.

 

Despite its declining share of the worldwide rough market, De Beers still controls 38 percent of global production. In comparison, Rio Tinto and BHP Billiton have just 6 percent, while even Russian mining giant Alrosa has a considerably smaller share at 23 percent. And that substantial De Beers' share of the market, as well as the promising future for diamond sales in China and elsewhere in Asia, persuaded Anglo American of the need to move ahead with the deal.

 

Anglo CEO Cynthia Carroll said the firm had identified diamonds as being “absolutely core” to the business several years ago after a strategic review designed to streamline its multifarious portfolio of holdings. “I’ve been clear and consistent that we want to build on that position and, if there was an opportunity with the Oppenheimers, we would take that opportunity,” she said.

 

An important issue, she said, was the 10-year sales agreement signed in September by De Beers and the government of Botswana, home to the group’s most lucrative mines, which provides security of supply for De Beers. However, she dismissed speculation that Anglo aimed to spin off De Beers through an initial public offering. “That is not in our minds at all – our minds are around building and supporting success of De Beers going forward,” she said.

 

Furthermore, the “phenomenal job” in marketing diamonds to customers in emerging markets, particularly China, now the world’s second-largest diamond market achieved by De Beers was also a crucial factor, the American-born Carroll said in an interview with the Financial Times. Over a 20-year period, De Beers had managed to convince Chinese women that diamonds were not only a store of value, but also a symbol of love. “In 1993, there wasn’t a single store in China where you could buy a diamond,” Stephen Lussier, chief executive of De Beers’ Forevermark retail brand, has noted in the past.

 

Anglo shareholders had been pressing for some time for the deal to go through, as they believed that their interest in De Beers was undervalued, Carroll said. “There’s massive growth potential for diamonds," Carroll explained. "The attractiveness of this industry is the fact that not only is the demand out of the emerging countries, but it's also in the developed countries as well," she stressed.

 

“Prices have exceeded the peak levels of 2008,” Carroll stated, adding that demand was expected to outperform mine supply significantly, which would lead to the supply-demand gap continuing to drive rough diamond prices. She was confident that the “iconic” De Beers brand would enable the diamond giant to capture the opportunities of the “rapidly evolving diamond market.”