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(International Diamond Exchange) Privately Held De Beers To Go Public Again

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(International Diamond Exchange) Privately Held De Beers To Go Public Again
WEDNESDAY, JUNE 30TH, 2010, ISSUE NUMBER 242

Many analysts are convinced that by early next year De Beers will again seek a public primary listing on the London Stock Exchange, with secondary listings on the Botswana and Johannesburg stock exchanges. The current shareholders (Anglo American 45 percent, the Oppenheimer family’s Central Holding 40 percent and the government of Botswana 15 percent) would either sell off parts of their holdings or accept ownership dilution through the issuance of new shares to the investment community.

De Beers’ management officially dismisses all of the talk, saying this is a matter to be decided by the company’s shareholders. Privately they have very lucid views on such an eventuality – and I bet that some of the scenarios are realistic and certainly appear advantageous to both Anglo American and the Oppenheimer family. A relisting would provide these shareholders with exit strategies – whether gradual or immediate. The key in this game is what Nicky Oppenheimer (and his son Jonathan) wants. More about that later.

It is for the trade and industry to ponder whether such a move would impact the downstream players, whether it would affect the stability of the industry and whether it would trigger changes in the management of the business. Then there are secondary questions as to whether such a move is “good” for the mining joint ventures with the governments of Botswana and Namibia.

One might even wonder whether the company isn’t already in “going public mode.” Is De Beers’ current policy of leaving much-needed goods in the ground and thus creating market shortages that will drive up prices, motivated by a desire to optimize short-term revenues to make its balance sheets more attractive on the eve of a listing?

Several respected analysts dismiss this whole exercise by pointing to the current, heavy company indebtedness (of well over $3 billion) and the company’s less-than-convincing performance. These analysts may need to be reminded that the De Beers privatization process was put in motion in the second half of 2000 when the diamond market faced “unparalleled prosperity,” to quote something Nicky Oppenheimer said at the time – and the market value of the diamond business was priced accordingly. By the time the shareholders approved the deal, in May 2001, the market had already began its downturn.

If De Beers’ shareholders are planning to go public next year, this might be timed with the beginning of the renewed growth of consumer demand; it would not take place during the “peak,” so investors would be buying “blue sky” shares with the potential for upward opportunity. For a mining and exploration company, the timing of the possible relisting makes for a “sexy” proposition.

True, debts are not helpful, but the prospects of realistic share-price appreciation would undoubtedly make a listing successful. Current shareholders might be able to get their shareholder loans back – something that would be particularly helpful to the Oppenheimers, who financed their latest injection of funds into the company.

The free float (i.e. the proportion of shares not held by the current three major shareholders who may not sell their shares) is likely to be limited to about 25-30 percent. So, the listed company would, just as in the past, be managed as if it were private. The question is by whom? Anglo American or the Oppenheimers?

If the initial listing price is fair, a renewed De Beers would be far more popular among investors than the “old” public company. In 2001, the privatization of De Beers was almost borne out of necessity; in 2011, there are different but no less compelling reasons to consider relisting.

What A Difference A Decade Makes

A decade ago, De Beers faced an almost ridiculous situation as a public company. The company’s balance sheet had two components: its diamond business and investments in other mostly public companies, including more than a third of Anglo American shares. There were periods in which the value of the company’s investment portfolio was above the entire market capitalization of De Beers.

In other words, there were times when the investment community valued all the De Beers mines, all its sizeable diamond stocks in London, all its reserves in the ground, all its real estate, all its cash flow and its diamond business at less than zero. There was absolutely no question that De Beers’ market capitalization had an abominable history of massive under-valuation. The investors simply didn’t trust the company – and for good reason.

The controlling Oppenheimer family never feared a shareholder revolt. Its cross-shareholding (where Anglo American held 32.2 percent in De Beers and De Beers held a 35.4 percent share of Anglo American) had made the company virtually “takeover proof.” There was no fear of corporate raiders; the company was bulletproof. The chances that the Oppenheimers would be unseated were also close to zero, as the family separately held some 7.2 percent in Anglo American and 2.6 percent in De Beers; they were untouchable.

The funny thing is, as a DTC Sightholder remarked this week, “when De Beers was listed they managed their business like a private company with vast resources of monies. Only after becoming a private company, they started to act more like a public company…”

At the time, investors didn’t like the lack of transparency. They also despised the arrogance and haughty management posture by executives whose main objective was “to please the boss.” Let’s face it: when you are a cartel, you don’t need employees with entrepreneurial instincts to compete more effectively in the market. Nepotism was rife back then.

These characteristics are long gone now. However, they will always be remembered by the prohibition of DTC (then CSO) clients from using the front door to enter or leave the then new Charterhouse 17 building. At one time, Sightholders could only come in through the (Saffron Hill) service entrance, behind the iron gates where cars drove in. Executives received their bonuses (or part of them) directly from the Family Company, lest they would forget for whom they worked…

NFO Was and Remains the Driver of Change

As the various chairmen of De Beers clearly left their indelible imprint on the company’s affairs, I need to be accurate here: between 1929 and 1984, the company was consecutively chaired by Ernest and Harry Oppenheimer. This was followed by 14 years of chairmanship by Julian Ogilvy Thompson, an outsider, who was reluctant to hand back the top job to an Oppenheimer. But Harry prevailed. The present chairman, Nicky Oppenheimer, came in on January 1, 1998; two years later, his legendary father passed away. Since then, things have never been the same.

Under Nicky’s management, there have been Strategic Reviews, the settlement of the anti-trust problems, the introduction of Supplier of Choice, the creation of the De Beers jewelry stores (a joint venture with LVMH), and, most relevant for this column, the company’s privatization, of which Nicky was the principal driver.

Back in 2000, Nicky realized that the cross holding with Anglo American represented an obstacle, an anachronism that needed to be abandoned. He personally had to make a choice: to go with Anglo American or to go with diamonds. He consciously chose diamonds. To lift the cross holding and have the grossly undervalued De Beers stand on its own would have made the company easy prey for corporate raiders. Going private through a management buyout was the only viable proposition.

And that is what happened. Oddly, the very same analysts and investment companies that had always kept De Beers’ shares undervalued, as the “company wasn’t worth more,” then changed their tune. They charged that the diamond business was worth more than Nicky Oppenheimer, Anglo-American and Debswana were willing to pay for it.

The De Beers diamond business for the purpose of privatization was first valued at $8.3 billion. Under great pressure from the institutional shareholders, the offer was eventually changed to $9.3 billion. The rest is history. The continued stewardship by Nicky Oppenheimer was guaranteed by a management contract. He is still the man in charge.

Prospects of Re-Listing

Today, De Beers is a very different company than it was 10 years ago. Its business model has changed dramatically. Its cartel structure has been dismantled. The domestic beneficiation aspirations of its government partners have been accepted and embraced. The Supplier of Choice marketing model remains the rough diamond marketing model, though it is continually adapted to new realities. The DTC has ceased to purchase or sell the Russian output. Its Canadian properties are producing. The changes in business model necessitated a transformation in the kind of work force needed to run De Beers.

To many people in London, most of what is described in this column is from “before their time.” There are many young, ambitious, well-educated people in London with MBA’s and marketing experience – who may not necessarily know much about diamonds. Managing director Gareth Penny has embedded a highly responsible and transparent governance culture (with zero-tolerance for some practices, which only a decade ago, were often the norm.) If the company goes public, Gareth may be able to provide young talent with share options – a powerful incentive to draw the best and the brightest to the company.

The De Beers privatization of 2001 was the brainchild of Nicky Oppenheimer – he presented the detailed proposals to Anglo American and Debswana. We believe that history may repeat itself. Though analysts are eager to point out that De Beers doesn’t really fit into Anglo American’s current business model and that, in any case, De Beers has become the giant mining conglomerate’s worst performing asset, Anglo American is not likely to be the driver behind a De Beers relisting. It will undoubtedly welcome such a move, as it provides the company with a possibility to develop an exit strategy.

How much is the company worth today? At the end of the day, the value calculation depends on the discounts applied to the estimated future cash flows that the publicly listed company would generate. It also depends on the valuation of certain assets (such as exploration properties, the Forevermark branding initiative, etc.) We don’t want to get into that – because we don’t take it for granted that De Beers would be listed “as is.”

We would conjecture that the Oppenheimers might want to take the Element Six business, the Forevermark brand and the jewelry stores joint venture, and keep them for the family. The listing would, we expect, be only for the diamond exploration, mining and marketing business – definitely the core elements of De Beers and more appropriate for staying in the Anglo American stable.

In 2000, Nicky Oppenheimer showed that he could work well under a cloud of the greatest secrecy; he knows what questions to put to his team; he sharply and accurately anticipates the reactions of the stakeholders.

The key now is timing. Nothing will happen, or is not likely to happen, before the Botswana marketing contract, which expires in December, is renewed. But renewed it will be. If my guess is right and the family opts to leave the synthetics and jewelry business to the younger Oppenheimer generation, the relisting may see the departure of the Oppenheimers from the mining side. One thing is for sure: the family has a unique ability to surprise and it won’t be any different this time around.

Labels: ANGLO-AMERICAN, DEBEERS, DIAMONDS

posted by MrK @ 6:27 PM