BHP Group Ltd (ASX: BHP) shares are in focus as the company is currently trying to buy the S&P/ASX 200 Index (ASX: XJO) copper miner OZ Minerals Limited (ASX: OZL).
BHP is a huge business. According to the ASX, it has a market capitalisation of $198 billion.
OZ Minerals is a pretty big business for the ASX, with a current market cap of $8.56 billion. However, it is absolutely dwarfed by BHP.
BHP's bid for OZ Minerals was a cash offer of $25 per share. This was a 32.1% premium to the last closing OZ Minerals share price.
But, the board of OZ Minerals has already decided to reject the offer. BHP noted that the cash offer would deliver "immediate value" to OZ Minerals shareholders. It said it would also de-risk any value which may or may not be reflected in the OZ Minerals share price.
BHP's CEO Mike Henry noted that the company is facing a "deteriorating external environment" and increased "operational and growth-related funding challenges".
Is the offer for OZ Minerals good value?
According to analyst Dylan Kelly from broker Ord Minnett, the offer already "overvalues" OZ Minerals. Now, the $25 offer represents a new price floor that could increase in a "drawn-out sale process" as reported by The Australian.
Kelly also said that:
Compared to our previous discounted cash flow valuation of about $21 a share, it would appear BHP is overpaying relative to its fundamentals.
But, OZ Minerals is now "in play" in terms of a potential deal.
What would the takeover mean for BHP?
Reporting by the Australian Financial Review (AFR) pointed out that analysts at JPMorgan believe BHP should have tried to buy the business before 2020 when its share price was less than half what it is today. That was before the market had as much understanding about OZ Minerals' growth projects.
OZ Minerals could go from 2% of BHP's earnings before interest, tax, depreciation, and amortisation (EBITDA) to about 10% in the longer term.
The JPMorgan analysts said:
Aside from potentially making the Carrapateena block cave bigger, it's hard to see the value uplift that BHP can create on OZL's asset base…But it does make strategic sense.
OZL's Prominent Hill underground asset is potentially sub-scale for BHP, however, should the company successfully convert the large, inferred resource into reserves, then at least it's long life.
The AFR points out that OZ Minerals has two copper mines and BHP's Olympic Dam (a copper, gold, and uranium deposit) is between them. Therefore, the deal would mean the combination of adjacent assets and the ability to share infrastructure to unlock extra capacity.
The AFR also reported that insiders had described the area as like a "chequerboard" because of how the copper was spread around.
More copper has been found 60km away at Oak Dam. But "people close to BHP" reportedly reject the idea that the bid for OZ Minerals suggests Oak Dam is "flawed or underwhelming".
Why did Oz Minerals reject the offer?
OZ Minerals may make a deal hard to complete. It points out that there is a "strong long-term outlook for both the copper and nickel markets underpinned by increasing geological scarcity, global electrification and accelerating decarbonisation, to which OZ Minerals is highly leveraged."
The board of OZ Minerals notes that the acquisition would deliver "significant synergies and other benefits" for BHP. The board thinks this is not reflected in the value of BHP's proposal.
BHP share price snapshot
At the time of writing, the BHP share price is $39.07, down 0.13% for the day so far.
Over the past month, BHP shares have risen by 2.8%.
