End of the Oppenheimer Diamond Dynasty

* CHAIM EVEN-ZOHAR | Friday November 18, 2011 00:00

'The discussions around accepting this $5.1 billion offer have been very difficult for Jonathan and me; after all, the Oppenheimers have been involved in the diamond industry for more than 110 years. However when presented with the offer from Anglo, we had to think in the wider context of what was in the best interest of the family as a whole.

After much debate we came to the unanimous decision that the right way forward for the family was to accept Anglo American's offer.' The end of any dynasty is generally shrouded in drama - stuff of movies are made, bestseller books are written. There is the carefully planned 'public scenario', the media-spin, the attempts to craft and manage the final version of the dynasty's history and, what investigative journalists call, the 'real behind the scene story'. In this editorial, we only want to highlight mostly one aspect of the deal: the low selling price.

Lack of Natural SuccessorIt was known that the Oppenheimer family wanted 'out', especially Nicky's sister Mary and mother Bridget, but that it was Nicky who really would have wanted his son to continue. The Oppenheimers held chairman and director positions in both Anglo American for about 100 years. In Anglo American, which was founded by Nicky's, grandfather Ernest in 1917 and in De Beers, of which Anglo wrestled control in the 1920's. Jonathan was groomed to lead the fourth Oppenheimer generation in the diamond dynasty. 

One may recall the elated Daily Telegraph story of only a few years ago, in September 2005, announcing 'Jonathan Oppenheimer, the heir apparent of the diamond dynasty which runs De Beers, moved a step closer to taking over from his father at the helm of the family's business interests when the company announced a dramatic management shake-up. Jonathan Oppenheimer, the heir apparent of the diamond dynasty which runs De Beers, moved a step closer to taking over from his father at the helm of the family's business interests when the company announced a dramatic management shake-up.'

'For the past 18 months,' says the London daily, 'Oppenheimer, [then] 36, has been managing director of the largest division of the company and its historical heart, called De Beers Consolidated Mines in South Africa. ... Following the reorganisation, Oppenheimer will now work closely with his father Nicky at the top of the De Beers group. He will also chair the Canadian arm, which is expected to open its first diamond mine in 2008.'

The sad fact is that Jonathan didn't 'have' what it takes to assume the reins. Throughout the years, Nicky had often faced embarrassing questions about his son's abilities - which were invariably rebuffed with fatherly love and passion. It didn't change the facts. In the last few years Nicky kept his son close to him allowing Jonathan to serve as 'Head of the Chairman's Office responsible for the Direction and Implementation of overall Group strategy.' Whatever that means.

In the past year Nicky's frantic attempts to catapult Jonathan into the leadership position were clear to all. When announcing the appointment of the new CEO, Philippe Mellier, - a few days after Diamond Intelligence Briefs had first published his identity - Nicky repeatedly stressed the team decision of 'Jonathan and I'. Indeed, in the first presentation to shareholders, Mellier expressed the words 'Jonathan and Nicky' many a time. Jonathan joined Mellier on many of his meetings to the diamond centers, especially Antwerp. There was clearly a re-shifting and re-positioning of the Jonathan role in De Beers in the past year.

The concerted efforts to 'position' Jonathan came in the wake of Nicky being slighted by Anglo American Chair Sir John Parker who refused to appoint Jonathan as a Director at Anglo American, after Nicky decided to step down after serving there for over 40 years. Sir Parker gave all kinds of 'governance reasons'. These were lame excuses. To deny an Oppenheimer his rightful place in the board room of Anglo American is akin to refusing Mickey Mouse entry into Disneyland. The writing was on the wall.

Botswana Puts Shareholders 'on Notice'A decade ago, the Oppenheimer family still owned some 8 percent of Anglo American; this holding has dwindled closer to only 2% today -- as the family had been offloading Anglo shares mostly to Chinese buyers. It may be recalled that, in 2006, the family holding company, E. Oppenheimer & Son, started to sell off it Anglo's shares to China Vision Resources. Further sales in 2010 brought the family's holding to below 2%.

De Beers is owned for 45% by Anglo, 40% by the Oppenheimer family and 15% by Botswana. The third shareholder in De Beers, the Government of Botswana, had quietly been watching the Oppenheimer disposal of Anglo American shares. Throughout the past year the financial markets had been awash with speculation that Anglo may be looking to exit the diamond business. During Gareth Penny's final days as De Beers CEO there had been market talk about a possible relisting of De Beers. The Oppenheimer family had been rumoured to be 'a seller' for many months.

The last thing Botswana wanted was to take the risk that it suddenly would have a Chinese partner. It needed to put in safeguards. It wanted to use its 15% as leverage to control its diamond future. Botswana found that opportunity when it renegotiated its marketing agreement with De Beers.

After DTC CEO, Varda Shine and her team had completed all the negotiations for a ten-year contract in the first few months of 2011, suddenly the negotiations grinded to a halt. The signing was delayed and delayed. There were all kinds of excuses - lawyers took time, waiting for new CEO to come in, etc. - but as we then reported in this publication, the sticking point was one single clause that would allow Botswana to renegotiate the 10-year contract in the event there would be a change in shareholding.  Both Anglo American and the Oppenheimer Family's Central Holding company resisted that clause. A ten-year marketing contract is 'bankable' - it has enormous value. A package of De Beers share is worth far more if there is a 10-year guaranteed diamond off-take agreement with Botswana, then without it. The agreement guarantees a 10 year orderly cash-flow. The two major shareholders in De Beers didn't want that clause - but Botswana didn't give in.

No Willing Seller - Willing Buyer EnvironmentIn the end, Botswana made a compromise with its shareholders. The 10-year contract would not be renegotiable in the event a change in shareholding would take place among the existing shareholders. This would have dramatic financial consequences for Nicky Oppenheimer: to get optimum value for his shares he would need to sell his stake either to Anglo American or to Botswana (or to both). Selling to a third party became a lesser option.

Giving the appropriate spin, Nicky Oppenheimer told staff and clients that 'if we were ever to sell our stake in De Beers, Anglo American was always going to be its natural home as they have been major shareholders in De Beers since 1926 and have a good knowledge of the diamond business.'  With all due respect to Nicky, if another party would have paid more - the family would undoubtedly have gone for the higher option. But Botswana denied them the opportunity to shop around. The government used its leverage artfully.

Sales Price is Below Market ValueNo one will cry too much when getting a $5.1 billion price - and an option for additional payments under certain circumstances. The leading diamond analyst in the market, Royal Bank of Canada's Des Kilalea, thoughtfully notes 'the price agreed is some 30% below our valuation.' The $5 billion price tag sounds less attractive if one is being told the very same day that the true value would be $1.5 billion more. There are other estimates that put the actual market price even higher, but that isn't really relevant. What is important to realize is that Botswana's clever contract renewal negotiations limited the Oppenheimer's options.

What's In It for Botswana?The terms of the agreement allows Botswana to exercise its pre-emptive rights and increase its own shareholding to 25%, leaving Anglo with 75%. In a statement, the Botswana government says that 'this option will be explored in the coming months.' It is not in a hurry; it can make this decision at any time before the deal is actually closed - after getting the necessary regulatory and shareholder agreements. We believe that this is a matter of about six months - and that the deal will be finalized in the second quarter of 2012.

Botswana will have the opportunity 'to buy cheap' - but it still will need $1.3 billion(P9.4 billion) cash to do so. That's a lot of money. Moreover, it still may be 'overpaying' since a minority share should be priced lower than a controlling shareholding. Last Thursday, when Anglo American Chair and CEO together with Nicky flew into Gaborone to inform President Ian Khama of the deal, the Botswana president had plenty of reasons to be satisfied. The one clause that had held up the marketing agreement for such a long time had paid off. Never before had the country exercised the amount of leverage and influence on a De Beers share transaction.

Anglo American is really a winner here. A few months ago, it was willing to sell out. The markets called Anglo either a buyer or a seller of De Beers shares; it was clear that the current structure of three shareholders was not sustainable.

It had a 45% holding that it wasn't managing; it wasn't consolidated in its balance sheet; it could not use its stake as collateral to reduce its financing costs.

Change was needed.  The final text of the Botswana agreement provided an opportunity to buy the Oppenheimer Family stake at a bargain price. What a difference one clause in a marketing contract can make. 

* Even-Zohar is a Tel Aviv best diamond industry analyst.