Botswana’s 15% Stake in De Beers: To Sell or Not to Sell is Not the Question – The Timing Is!
July 20, 06The
Anyone listening carefully to what
This sounds unconvincing, as he immediately adds, “the original reason to have a stake was to gain a board position in De Beers and insight into the diamond industry. At the time the diamond industry was known for its secretiveness and even though we were getting assurances that we were getting as much information as needed, you could not really prove that that was so, and just take comfort in that – so it was felt [useful] having a foothold in the boardrooms of the entity that was managing the diamond industry worldwide.”
That is a remarkable comment and Dr. Tibone really calls a spade a spade: the government acquired its stake in De Beers to “find out” what is really happening; to get a better insight in the transfer pricing mechanisms between Debswana and the DTC in
Tibone says, according to Mineweb, that these reasons are still valid today. That is surprising – but it may not even be relevant. There are compelling other reasons why
In the past, when Debswana was the leading member of the cartel, it was vital to have a stake and say at De Beers to guarantee or underwrite the nation’s ability to pursue sound macroeconomic policies. Membership in the cartel’s marketing mechanism and the artificial management of the world’s diamond industry’s supply and demand situations guaranteed, for almost thirty years, a steady and reliable cash flow in support of the nation’s budget and development projects.
When De Beers decided to abandon the illegal monopolistic policies to cease the maintenance of its buffer stocks to facilitate market interventions, and to pursue a policy of expediting the sale of current output through enhanced efficiencies in sorting from mine-to-market around 1999, Botswana’s policy makers may not have realized how dramatically this would affect the management of its domestic economy. It wasn’t felt immediately. Between 1999 and 2004, De Beers “dumped” over $5 billion of inventory into the markets – and
Now the benefits of the cartel management have fallen away. From 1998-2006, the Botswana government saw (at least twice) rough diamond prices steeply fluctuating in a band of more than 30 percent in very short time-spans. These vacillations are reflected in a remark made in a budget speech by Botswana’s minister of finance expressing satisfaction that “a significant increase was realized in mineral revenue, which was mainly due to the cumulative 19 percent increase in diamond prices in US dollar terms during the 2005 financial year.” A planned deficit turned into surplus. That sounds good, but it isn’t the way to run a country.
We believe it wasn’t fully realized that the breaking up of the cartel didn’t just mean that De Beers would now compete with Alrosa, Rio Tinto, BHP Billiton, and others. No, it also provided an opportunity for the individual members in the oligopolistic environment, such as Botswana, to decide whether to pursue the interests of the industry as a whole (which may give higher profitability to all or to a specific subgroup, such as De Beers), and thereby avoids what Harvard Business School strategist Michael Porter calls “inciting competitive reaction,” or to behave in its own narrow interest at the risk of touching retaliation and escalating industry competition to a battle.
The choice is not easy: choosing strategies that avoid the risk of industry warfare (i.e. opting for maximum cooperation among the players in the oligopoly) may be better for the industry at large – but it may mean that
Debswana has made its choice. It will position itself in the best possible manner – and the establishment of the DTC Botswana and its own sales and marketing (branding) plans speak for themselves. As the world’s largest diamond producer, with the lowest cost mines,
Overnight,
In the past few years the government of
On both fronts, De Beers may not have fully realized or anticipated the far-reaching ramifications of this decision on De Beers, on its Supplier of Choice model, or on its relationship with the producer and its government.
There had been some tell-tale signs. De Beers executives were quite shocked to learn that the Botswana government had secured the services of an international (value creating) consulting firm, L.E.K. Consultants, to review the diamond market and to advise the government on strategies vis-?-vis De Beers on the eve of the negotiations on the renewal of the Jwaneng mining lease and the renewal of (the always considered automatic) marketing agreement with the DTC. A highly professional multi-ministerial committee was established to conduct the negotiations.
An even stronger alarm signal was given in 2004 when De Beers suggested to Debswana and/or the
Debswana is far more important to De Beers than De Beers is to
Debswana is now going its own way. It wants to sort, sell, and market its own output. Through the DTC Botswana they have got what they wanted. A DTC Botswana may well contribute to the dissolution of the Supplier of Choice marketing strategy as we know it today – but that is of less concern to Debswana and the Botswana government than it is to De Beers and its other partners.
Botswana in Competition with Other Players
The
As Debswana will now pursue its own best interests, the need for the
So at the end of the day it is clear: When stripped to basics,
The “Nicky Factor” – Seller or Buyer?
So what is the best time to sell? Why do I think that
Before getting to the details of the arrangement, there is a more than reasonable likelihood that the seven year management contract, which expires in mid-2008, will not be renewed. Would Nicky Oppenheimer remain interested in De Beers if he had, indirectly, only 20 percent of Debswana, 20 percent of Namdeb and about 29 percent of DBCM? Especially after Debswana’s “independence” – selling and marketing its own output – would there be much excitement in chairing the holding company?
There are a few scenarios: Oppenheimer may either want to increase his stake (and he may want to buy
The contract was basically concluded for three purposes: (a) CHL obligates itself to contribute to the strategic development and growth of DBI; (b) CHL contributes to general marketing initiatives of De Beers and relationships with key customers and suppliers; and (c) CHL is responsible for the appointment of senior executives and directors of De Beers. The latter is key.
In financial terms, CHL is entitled to a management fee of $5 million per year in respect of each of the years 2001 to 2007 (inclusive). Moreover, at the time of the De Beers privatization, CHL received participation certificates from DBI that entitles it to an annual incentive distribution, which is based on performance, of up to $10 million in each of the years 2001 to 2007 (inclusive).
DBI has the right to terminate the management contract on 12 months’ written notice. However, such notice can only be given after the seventh anniversary of the completion of the privatization, which was completed in mid-2001. So notice can only be given at mid-2008, meaning that in any event Nicky Oppenheimer can still single-handedly manage De Beers until mid-2009.
However, Anglo American has rights as well. Anglo American has the right to require DBI to give such termination notice (after mid-2008), subject to prior consultation with (not necessarily subject to prior approval of) Debswana.
In other words: Anglo can terminate the management contract with CHL – and the expectations are that it will avail itself of that option. There is also a clause that would trigger the premature automatic cancellation of the contract: if CHL’s (the Oppenheimer’s’) shareholding dips below 25 percent of holding (ordinary) shares in DBI.
If the Oppenheimer’s are truly determined to continue a vital (dominant) role in De Beers in the future, it would make sense for them to purchase the 15 percent stake of
This sets the parameters of the “window of opportunity” in which
In any event, the current Botswana shareholding in De Beers has lost much of its strategic significance (in terms of Botswana finding out what is really happening in a secretive company) and, after 2008, when Sight aggregation is taking place in Botswana and Debswana has its own clients, it makes the mother company– how do I say this nicely – less relevant.
Debswana and the government of
Have a nice weekend.