De Beers: The gem everyone is looking to get their hands on

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JIMMY MOYAHA: As I mentioned earlier, De Beers is up for sale according to Anglo [American], and there are a few participants out there who can’t wait to get a slice of the pie – or perhaps get an idea of whether or not they can get in on the deal.

I’m joined on the line by the chief executive for corporate and advisory at Deal Leaders International, Andrew Bahlmann, to take a look at this and see if we can make sense of it.

Andrew, lovely to have you on the show, as always. It’s always nice to have an M&A [mergers and acquisitions] specialist I can phone up at a moment’s notice and ask all these questions – because this is one of the most peculiar ones that we’ve seen of late.

Diamond prices have gone down, yet there’s an excessive demand or huge interest in buying up De Beers. Why is that?

ANDREW BAHLMANN: Yes. Hi, Jimmy. Thanks again for having me. It is almost counter-intuitive.

We know that the diamond market has been under severe pressure for a long, long time. But there just appears to be this premium-brand alarm.

It’s almost like the ‘jewel in the crown’ around De Beers and what it represents. We always say, based on the demand, that really unpacks whether there’s attraction to the asset or not.

As you opened up with two previous CEOs and Michael O’Keefe out of Australia, you just realise that, yes, there’s definitely something there. One always hopes guys know something we don’t. But plus the writedown in the Anglo books, it’s a very interesting one, and maybe it’s an exercise to get it at a discount and trade out.

It’s going to be interesting to see how it plays out and unfolds.

JIMMY MOYAHA: So Andrew, how do you do that? What deal do you put on the table? You mentioned that writedown, $3.5 billion in impairments over two years from the Anglo business on the De Beers asset, and still the dubious portfolio they value at just shy of $5 billion. If you’re coming to the table, you’d better have $5 billion to put down on the table. That’s before you get into a bidding war with the six or so other people who might be interested in the business. Where do you put in an offer?

Is the $5 billion realistic from a valuation perspective, and is the diamond market still really worth it?

ANDREW BAHLMANN: Great questions, Jimmy. I think at the end of the day we can do our valuation modelling till the cows come home, but I guess the true value will be what somebody’s prepared to pay for it.

I think that the starting point always is, if it’s the carrying value or the written-down value, book value in the Anglo financials, that’s their valuation. And I guess at the end of the day it always helps having multiple bidders at the table because one should get a spread of offers.

But to your point, your ticket to the party is a lot of money and you’re going to need some proper backing behind you to be able to get there, let alone get into a bidding war.

So it is very interesting, and the fact that it still carries such a high value, knowing the pressures coming in – obviously from, I’m going to say the artificial diamond market, and what that outfit looks like – it’s going to be very, very interesting to see where the final value lies, because I guess from Anglo’s perspective this is almost the final step in their cleaning up or restructuring their balance sheet. And it will come to a situation.

We saw it previously in the likes of an EOH or whatever it may be – where you have to offload these assets. Do you take a bit more pain or do you realise that carrying value you’ve got the asset at?

So lots of balancing and juggling up ahead, as I mentioned. But it does help having multiple suitors interested in the asset.

JIMMY MOYAHA: Andrew, before I let you go – on the ‘multiple suitors’ perspective, is it worthwhile to even consider multiple suitors teaming up and taking up smaller chunks of the business? So I don’t have to take on all the risk if I am the Botswana government, for example, which now supplies 70% of the rough diamond production that De Beers is known for.

I can then say I want to increase my stake from the 15% that I own – perhaps only to 20% – but at the same time another suitor might then come and say, well, we’ll take up the other 20%. Is that kind of deal something that we could see happening here, because Anglo has already been very clear that they’d prefer a sale over an IPO [initial public offering] – and I guess that is a lot cleaner than having to go the route of an IPO.

Is there something in the works where you think we could potentially see multiple suitors saying, ‘You know what, let’s go halvies on the deal’.

ANDREW BAHLMANN: Yes, I like the strategy. I really think it’s a good one.

And I think there’s a high probability that there could almost be, not necessarily a consortium, but a blend to get there, because there is a lot of risk for a single party to take, especially with the outlook. So it would be good.

Obviously there are a lot, I suppose, of more qualitative issues as well as quantitative, working with multiple parties. But in an asset like this, I think it’s a sound strategy as one of the options. Definitely.

JIMMY MOYAHA: That could definitely be something that works out. Andrew, before I let you go, I want to take a look at that other side of that coin, that IPO. It is still an option available. I suppose, if you have at least six or so interested parties you shouldn’t need an IPO, I would think. If the first party falls away it’s unlikely that all six of them will fall away, unless something major comes up in terms of a discrepancy. But that also seems very unlikely in the De Beers case.

Can we conclude that it’s unlikely we’ll see an IPO here?

ANDREW BAHLMANN: Look, I would say it’s unlikely because I could understand that strategy if there was zero interest or one needed to go up a far more almost conservative route because you’re not dealing with the next big thing here.

So you’ve got a very, I’m going to say, pedestrian or struggling outlook.

The IPO valuation I think would probably come short of what Anglo would be looking for.

So never rule it out 100%. But I do think it would be unlikely in this situation.

JIMMY MOYAHA: Well, we’ll keep an eye on this deal. We’ll see how it shapes up. I’m sure you and I will be having a conversation, Andrew, once we have more information around who potentially has picked up the De Beers assets. But until then, we’ll leave the conversation on that note.

Andrew Bahlmann, the chief executive for corporate and advisory at Deal Leaders International, joined us to take a look at the fact that De Beers is up for sale and everybody seems interested.