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De Beers Buyback
Jun 1, 2001 3:05 PM
By Des Kilalea
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The real effects of the transformation of De Beers from a listed public company to, effectively, a private one may take some years to manifest themselves. Other than shareholders who have reaped a windfall in the short term, the bid by DBI, a company owned by the Oppenheimer family (40 percent), Anglo American plc (45 percent) and Debswana (15 percent), seems to have more drawbacks than positives. In time, the diamond industry, South Africa (SA) and even those shareholders who celebrated a massive profit from the bid, will regret the passing of De Beers to private hands after being listed for 108 years.
De Beers is one of the largest and most active stocks traded on the Johannesburg Stock Exchange (JSE) and has long been one of the most popular South African stocks traded in the UK and the U.S. The total value of all stocks listed in Johannesburg is some $185 billion and De Beers normally accounts for 8 to 10 percent of this.
The importance of De Beers to South African and emerging market and value investors was underlined during the takeover bid by the DBI group. It emerged that some 15 percent of the company was owned in the U.S., and that some of those shareholders had sufficient shares to block the bid. In San Diego, value investor Brandes alone had 6 percent of De Beers. Because De Beers has been so important to the SA securities industry, it is one of the most closely watched and analyzed companies. Analysts continuously mined De Beers' financial statements looking for value-adding snippets for clients. It was not unusual any week of the year (except deep winter and the quiet summer periods) to bump into a South African analyst in Pelikaanstraat, in Antwerp, or in the diamond buildings in Ramat Gan in Israel. A major driving force in the SA market is the quest for that little bit of information that distinguishes one analyst’s research from a competitor's and, hopefully, to gain more business in De Beers shares.
Some cynics have suggested that South African analysts have been moved to oppose the deal simply because they would not have jobs should DBI's takeover offer succeed. This is amusing, but without basis. The fact is that analysts had put a higher value on De Beers even before the DBI offer emerged. But the claim of self-interest does highlight the importance of De Beers to analysts as well as to the SA economy and the world
diamond business.
De Beers is unique. It is the world's largest producer of diamonds, by value, and is of critical importance to the economies of South Africa, Botswana and Namibia (it has diamond mining joint ventures in the latter two countries with the government). De Beers owns a portfolio of the world's top diamond mines, most at the bottom end of the cost curve. It can offer an unsurpassed range of diamonds to its clients and contributes mightily to the producing countries’ tax take. De Beers has probably been involved in more African countries than any other mining house.
The formation of the Central Selling Organization (CSO) by Ernest Oppenheimer in 1930 and the initiation of a generic advertising campaign by his son Harry in 1939 unquestionably contributed to Russia’s, Australia’s and Canada’s ability to develop diamond mining industries. It is likely too that the business of cutting and polishing in Antwerp, Israel, India and New York would have been more risky if the CSO had not helped prop up rough prices and spent some $200 million a year promoting demand for polished.
For South Africa, the delisting of De Beers is a telling blow. Privatization removes a global business from the stock market. Anglo American, Billiton SA Breweries and Didata, have already moved headquarters from Johannesburg to London. Half of the value of all shares traded on the JSE is accounted for by the top eight companies on the lists, and most of these are domiciled in London, or in the case of De Beers, about to disappear.
In other words, the JSE is fast becoming a regional rather than an international market because its leading global names have effectively emigrated or disappeared. In years to come, when foreign investors are looking for shares in large South African companies they will be buying them in London rather than Johannesburg.
What this means for the country in terms of capital inflows could be quite significant, and in the long term, detrimental to capital inflows and the currency. The privatization of De
Beers contributes to this.
But, in the case of De Beers, there is a further twist. The immediate impact of the deal is that some $3.1 billion will flow into South Africa and enable the SA Reserve Bank to reduce its forward book. This is positive and will contribute to some stability in the South African rand. Indeed, this is what would have seduced the monetary in the short term and led the South African president, among others, to welcome the deal. But in the long term the privatization of De Beers is not good for South Africa. It could lead to significant outflows from the domestic diamond mining business and that means that the inflow to South Africa of dividends from the growth of De Beers Centenary (the company which owns the mines in Botswana and Namibia and the international diamond business) will cease.
Besides, the departure of De Beers reduces the importance of South Africa in many world investible indices. But more importantly is that it removes from public ownership a truly unique business at what many believe is a cheap price in the long term. This is what analysts and fund managers have been fighting.
What about the diamond industry itself? The disappearance of De Beers from world stock exchanges means that fewer eyes will be focused on the industry and this must contribute to an erosion of market intelligence and transparency. As one sightholder commented privately: “Brokers’ analysts focused on issues which the trade magazines often ignored and this gave us new insight, which will now disappear.”
There is also a danger, in the short-term anyway, that DTC diamond sales strategies may be driven by the Oppenheimer family’s need to reduce debt, which could swell the already bulging pipeline. This is not something the diamond banks would relish. It will be worth watching, if at all possible, the trend in DTC diamond inventories.
The company which was founded in 1888 with English empire builder Cecil Rhodes as its chairman and was listed on the Johannesburg Stock Exchange five years later is the most recognizable in the diamond industry and arguably South Africa’s only truly global brand. It is certainly the most recognized name in the diamond trade and though it was not South Africa’s largest company (that accolade belongs to Anglo) it has long been a key component of the Stock Exchange in Johannesburg.
Since the Oppenheimers gained control, De Beers has made its way through a series of crises, some seemingly terminal at the time — the Depression in the 1930s when it closed its mines in the face of a supply glut, the bursting of the diamond bubble in the early 1980s when CSO sales more than halved, and the troubles of the early 1990s. Despite sometimes poor management, the company survived. The pity is that it is being taken private now when management has made the business more transparent and put in place a bold new strategy that envisages, among other things, a luxury goods initiative.
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Tags:
Anglo American, Australia, Banks, De Beers, Debswana, DTC, Economy, Government, India, Israel, Namibia, Polishing, Russia, South Africa
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