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Oppenheimer Bids for De Beers
Feb 15, 2001 6:27 PM
By Martin Rapaport
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As Company Profits and Share Price Skyrocket.
By Martin Rapaport
Wow, talk about sleeping giants. It’s official DBI, a new company owned by Oppenheimer 45%, Anglo American 45% and Debswana 10%, has made an offer to take De Beers private at $17.6 billion or $43.17 per share. De Beers share price has surged about 30% to $42 since the New Year.
In a presentation to analysts today Nicky Oppenheimer explained that he believed that the offer was in the best interests of the shareholders since it allowed for higher De Beers share prices by eliminating cross holdings in Anglo American. It also insured continuity in the diamond business since the Oppenheimer family would continue to manage De Beers. If the deal goes through Oppenheimer will run the private company under an exclusive management contract that will pay from $5 to $15 million per year through 2007. Oppenheimer said he will now devote himself full time to the diamond business. Citing the fact that his son Jonathan is working for De Beers he said, “Our family likes to put its money where it is working. And we will be working in the diamond business.”
Gary Ralfe managing director of De Beers was put in the interesting position of trumpeting the fantastic gains and profits of De Beers in 2000 while justifying Nicky’s takeover at what many independent analysts and shareholders think are give-away prices. One analyst challenged the independence of De Beers “Independent Director’s Committee” saying that everyone on the board had a stake in management and/or a stake in the new private company. Ralfe took exception to the question and said, that the independent directors committee practiced the highest standards of corporate governance. One analyst drew laughter when he pointed out that Gary was on the committee and wondered if that meant he would be out of a job when and if De Beers went private. Nicky responded, “The management of De Beers will continue to manage De Beers.”
Aside form the cute comments the real issue is whether or not the outside shareholders who own 60% De Beers will go for Oppenheimer’s offer. According to the complex proposal (see The New De Beers at www.diamonds.net) at least 75% of the votes exercised by independent shareholders will have to support the deal. It looks like there may be some serious bickering about the price before the independent shareholders yield up the company. Undoubtedly this will excite the press and retailers are well advised to keep informed so that they can answer questions from consumers.
Ironically, De Beers’s incredible financial performance in 2000 is not going to help the group trying to take the company private. Financials for 2000 are too strong. Record sales of $5.670 billion. Profits up 137% to $1.707 billion. Inventory down 23% to near working levels of $3.065 billion, Cash up 284% to $1.045 billion.
Independent shareholders are frustrated because now, finally, when the company has a great forward vision and strategic plan, when sales and profits have gone through the roof, now, management is trying to take the company private. It seems a bit unfair to them. Ralfe tried to justify the leveraged buy-out by explaining that 2000 was an unusually good year. 2001 would not be anywhere near as strong. The U.S. was weaker and one must consider the long-term profitability when pricing the company. Frankly, his arguments seemed a bit lame, after all Gary had been talking up the company for the past three years. Now he was talking it down to justify it going private.
On the other hand, in spite of record sales, nothing much happened to De Beers share price until Nicky put together the deal to take the company private. Ralfe’s best argument was that the strategic plan targeted De Beers market cap for diamond business to $10 billion by 2004 and the current buyout at a diamond business market cap at about $8.4 billion looked very good. Why wait until 2004.for another 20%?
The bottom line is that De Beers management is going to have to change track from selling shareholders on their great forward vision of the company to explaining why the vision may not be so great after all and why shareholders should sell out. The more shareholders believe in the great future of the company and the diamond business the less likely they are to sell out now. Ultimately it will all boil down to price that Oppenheimer and friends offer because after all shareholders are not in love with diamonds they are in love with money.
Oppenheimer is going to have to pay for the fact that he has done so well with De Beers. When one considers the dismal position of De Beers and their share price a few years ago - managements dream to fix the company and their great success at doing so – and then this takeover bid, you could say – sometimes your biggest nightmare is when your dreams come true.
From Oppenheimer’s perspective all we can say is good luck. His offer has taken the cat out of the bag and De Beers share price is now in play. It’s admirable that the man really wants to run De Beers and the diamond industry. Lets see what happens.
We will discuss details of the bid and potential ramifications for the diamond trade in the next issue of the Rapaport Diamond Report. Until then visit The New De Beers at Diamond.Net to keep informed.
If you have views on this or any other issues confronting the diamond trade please post them in the DiamondTrade Forum at Diamonds.Net. To get a Free Trade Password send email to tradepass@diamonds.net. You can also email news or opinions to news@diamonds.net.
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Tags:
Anglo American, Consumers, De Beers, Debswana
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