Analysis: Gertler versus Goodyear

This was not a good day for BHP-Billiton’s Ekati mine. It’s entirely irrelevant that the company gave a flat "no" to Dan Gertler’s DGI company's offer to buy the Canadian diamond mine. I have no doubt that Gertler never expected a different reply. It was not a good day for Ekati, because the whole world (the media, industry analysts, Bloomberg, CNN, New York Times, you name it…) considered the very possibility of an Ekati sale totally plausible, totally logic. As if they had been waiting for such announcement.

And that is quite weird. Israel’s Dan Gertler knows darned well that you don’t buy a mine simple by sending a letter to the chairman informing him that “this is to let you know that we are still interested in buying the Ekati mine.” If you want a deal, if you really want a deal, then you don’t inform the media, but you engage in quiet negotiations. You deny everything in public and operate in private. That’s how deals are sealed.

I think it was a bad day for Ekati, as it totally lost the media game. Look at this strange episode objectively.  Enormous media attention elevated a rather obscure (from an international perspective), young, ambitious, middle-size rough dealer; with no mining background whatsoever, to unprecedented heights, to the very level playing field of the world’s largest mining giants.

No one asked questions about the consortium. No names were given as potential partners. It was enough to hint that he has some $2 billion available for this and other undefined purchases. Gertler’s bid was seen as serious. I didn’t see a single newspaper questioning Gertler’s ability to bring up to US$2 billion to the table. No one said: “Who is Gertler?” Does he actually have that money? Or can he get it?

The utterly amazing thing is that whether he has, or can get, $2 billion or less, is totally irrelevant – at least for the time being. The way I see it, DGI doesn’t want to buy Ekati today – no, what it wants is to keep the pressure on BHP-Billiton. It wants to set the agenda. It wants to secure for itself a place around the table whenever BHP-Billiton is ready to deal. And then, Gertler may still find out that he merely helped BHP-Billiton by raising the (inevitable) counter bids by Rio Tinto and De Beers.

If “positioning” was the aim of the exercise of the past 24 hours, than Gertler passed with flying colors. Using rather unorthodox and unconventional methods, Gertler seems to be betting that he can “divide” the BHP-Billiton board – and eventually secure a majority. DGI seems to sense considerable internal dissension within the mining giant’s boardroom. Gertler had the audacity (“chutzpah”) to inform Chairman Don Argus that he believes that there “are now more members on your board in favor of selling to DGI than there were last year”, or something to this effect. Gertler may be right – and he may know some things that we do not. He may even be putting the Chairman or the CEO on notice that there may already be a coalition out there in his support. Gertler has nerve.

A few years ago, ex-CEO Brian Gilbertsen gave his diamond people two years to prove that diamonds represent real “core” business. BHP-Billiton wants to be number one, two or three in the world in any of their core activities. Diamonds do not yet qualify. In that respect, Ekati has been operating on borrowed time. The two years have passed -- Gilbertsen made room for Charles Goodyear. The time horizon may have been extended – but it seems still looming out there. The company still owns “only” 80% of one mine, plus dozens of joint exploration ventures throughout Canada and Africa. The most profitable part of the mine has been mined. Now more investments are needed to go underground. Industry sources assert that Goodyear is committed to diamonds. Goodyear trusts that his diamond team, headed by Kowie Strauss, will deliver. He has faith.

My view: if BHP-Billiton finds or acquires one more mine, there will never be any media conjecture on the firm’s diamond future again. A DGI type of letter would not need to be replied. But that’s all hypothetical; there is no purchase in the pipeline, as far as I know.

It is interesting that Gertler’s first unsolicited bid (in June 2003) was addressed to Goodyear. This time he aimed higher – believing, maybe, that Chairman Argus would be more inclined to become a seller.

If everything was “logic” and “rational”, the focus should have been on whether it made sense for Dan Gertler to make such an offer to begin with. Kowie Strauss, the Executive of BHP-Billiton’s Diamond Group, advised me early this morning: “Diamonds is a highly profitable business for BHP Billiton and we are actively seeking to grow this business sector. The diamond business forms the largest part of our minerals exploration budget (and has been so for several years now); we are building a successful branding program around Ekati's production, and we are in discussion with several parties about stepping into advanced stage exploration projects. We are not seeking to exit from diamonds and we confirmed that in writing to DGI last year.”

No doubt that Strauss’ reaction is genuine, honest and reflecting his own and his CEO’s opinion. Strauss means what he says. And it must pain him that the company is seen to be on the defensive. Spokesmen are forced to state the obvious and to explain positions which should be so self-evident that they don’t need to be mentioned. Thus it was stressed that “we want to grow the diamond business”. “We are not seeking to exit from diamonds and we confirmed this in writing with DGI last year,'' to quote BHP-Billiton's Tanya Price. “Diamonds is a highly profitable business for BHP Billiton and we are actively seeking to grow this business sector.” Why didn’t anyone ask Gertler what he would do with the mine after he bought it? Would he market through De Beers? Make a deal with Leviev? Fire the Antwerp office? Take the company public? None of the obvious questions were asked. The attention was solely focused on BHP-Billiton’s explanations around its firm denial.

“Some say the mine has reached its apex, making this the perfect time to sell,” suggests the Edmonton Journal. The market believes that De Beers made an offer (of some US$800 million) for the mine in last November. So DGI’s offer would be the third one within a year. The media speculates on values. According to Bloomberg, ABN-Amro estimates Ekati at A$1.1 billion, which is in similar range of the De Beers offer. Gertler, however, has apparently been counting on the dissension within the Board of Directors, counting on the fact that not all members of the board are supportive of BHP-Billiton’s continued commitment to diamond mining. He is gambling.

BHP-Billiton ended up rejecting the offer and, at the same time, assuring analysts and investors that it will be (1) growing the diamond business, (2) make huge investments in explorations and (3) is committed not to exit diamonds. The very fact that the world’s largest mining mammoth had to make all these explanations, issue all these assurances, and do all this convincing – is the very part of this strange episode that is utterly unconvincing. On Wednesday the share price declined – recovering on Thursday. It may have nothing to do with the unsolicited bid – but, if it does, then shareholders want to hold on to Ekati.

Incidentally, if I were to make an “unsolicited bid” (actually – only a letter indicating an interest in making a bid, without even mentioning a price) to buy, for example, Google or the New York Times, would such a “bid” reach any newspaper headline?  No chance. No chance at all. It would not even reach the back pages – maybe, at best, become a filler between the cartoons. DGI only had to call a few journalists – and the rest is already history. Google will give you a few hundred DGI entries based on the past 24 hours alone.

I think that it is the continued perceived uncertainty around Ekati that made the media to consider DGI as being dead serious. An amazing exercise worthy of any journalism or public relations college textbook. Well done, Dan, but don’t expect to become a BHP-Billiton sightholder soon. To earn that status, you just may have to buy the mine.