Final Exam
Background:
In June 2021, Anglo American plc, one of the worlds largest mining companies, announced a “demerger” of its thermal coal operations in South Africa. In the company’s press release, the CEO said this move was “a responsible transition from thermal coal.”
As you know, a merger is when one company buys out the shareholders of another company and takes over its assets and liabilities. A demerger is when a subset of Company A’s assets and liabilities are transferred to a newly created Company B, and the shares of Company B are distributed proportionally to the shareholders of Company A.
Anglo American transferred all the assets and liabilities related to its South African thermal coal operations, to a new company called Thungela Resources Limited. The shares of Thungela were given to the shareholders of Anglo American, who received one share in Thungela for every 10 Anglo American shares they owned.
Anglo American held onto all its other mining operations, including its metallurgical coal operations. Thermal coal is primarily burned in electrical power plants to produce steam which is then converted into electricity. Metallurgical coal is primarily used to heat blast furnaces in the steelmaking industry.
Scenario:
You work for an “green” investment firm with significant holdings in Anglo American. Because your firm tries to invest in environmentally friendly companies, senior management is excited about Anglo American’s move away from thermal coal. At an upcoming board meeting, the directors will be discussing the implications of Anglo American’s demerger. You have been asked to provide a briefing note to help the directors prepare properly for the meeting.
While the board is interested in knowing what the financial impact of the demerger will be on Anglo American, they also want to assess the quality of Anglo American’s financial disclosures. You have therefore been asked to base your note entirely on the most recent annual report of Anglo American, dating from six months before the demerger.
Requirements:
You have been instructed to address the following points in your briefing note. (The column of percentages indicates the weight of each section for grading purposes.)
1. Impact on Balance Sheet
Discuss what Anglo American’s 2020 balance sheet would have looked like without the South African thermal coal operations. If you can quantify the impact, do so, and assume that any difference between the assets and liabilities to be removed in the demerger is applied to retained earnings. Discuss whether the loss of these assets and liabilities is material, and whether the financial position of the company is better or worse without them.
25%
2. Impact on Income Statement
Discuss what Anglo American’s 2020 income statement would have looked like without the South African thermal coal operations. If you can quantify the impact, do so. Discuss whether the loss of these revenues and expenses is material, and whether the financial performance of the company is better or worse without them.
25%
3. Quality of Disclosures
Discuss the appropriateness and usefulness of Anglo American’s disclosures regarding its thermal coal operations. Specify what information is missing, if any, that would have made more accurate answers possible for points 1 and 2 above.
20%
4. Environmental Goals
Discuss, in general terms, the overall impact of this demerger on Anglo American’s environmental goal of making “a responsible transition from thermal coal.”
10%
5. Overall Evaluation
Evaluate the demerger decision overall, taking into account the above financial and environmental impacts. How does Anglo American benefit from this demerger? Was this a good decision? Justify your answer.
20%
