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After De Beers, what's next for the Oppenheimers?

12 january 2012

Two months after the Oppenheimer family sold its 40-percent stake in De Beers, and in the process caught the diamond industry by surprise, the Antwerp Facets says, the focus has moved to what led the family to exit diamonds after many decades of involvement, what it will do with the $5.1 billion it is to receive from Anglo American, and how the giant global miner will develop the De Beers brand.

On quitting the Anglo board earlier this year, De Beers chairman Nicky Oppenheimer said: “There comes a time when it’s right to stand aside and allow others to carry the baton. For me, that time is now. It was an extraordinarily emotional and difficult thing for us. I think also difficult because the family have been in diamonds since my grandfather came to South Africa in 1902."

According to reports, the decision of the family to sell its stake was based on three main factors: succession planning, the drop in the value of its mining interests and the possible need to again inject capital, and the possibility of taking the money and investing in more profitable enterprises throughout Africa.

For Oppenheimer, aged 66, the dream had been for his son Jonathan, 42, to become the fourth generation of the esteemed family to become chairman of the De Beers board. Educated at Oxford University, just like his father and grandfather, Jonathan had been involved with De Beers for 20 years, gaining experience in a range of areas of the company's operations.

However, it appears that Jonathan had not attracted enough support from De Beers' shareholders, Anglo American and the government of Botswana. When it became clear that they would not back him for chairmanship, his father decided that was one solid reason to exit the diamond trade, said analysts. Anglo American turned Jonathan down for a board position after his father's departure earlier this year and effectively shut off the route to the De Beers chairmanship, since it has a veto over the chairman's position.

Meanwhile, Peter Major, mining analyst at Cadiz Corporate Solutions in Cape Town, believes that Jonathan Oppenheimer himself may have little sentiment for the diamond trade, and less attachment to it than his father and grandfather. "Why should he have the same passion and vision and desire that they did?"

Despite Jonathan's route to the chairmanship of De Beers being blocked, Nicky Oppenheimer believes that his son is the future leader of the family's business interests. "Jonathan will certainly lead this process," his father said. "I am, after all 66; while I am active and not retired, he is the man that is going to do the business," he told the media following the announcement of the sale of the Oppenheimers' stake to Anglo American.

Although he declined to give details of the family discussions regarding the sale, Nicky Oppenheimer said it was a unanimous decision, and that the family would be active in managing its wealth. "No doubt everybody is going around speculating about what went on or didn't go on. We as a family act together and [sister and shareholder] Mary is extremely supportive of the process of finding new business to do," Oppenheimer told Reuters. "None of us are the sort of people who think you should bury your talents in the ground."

Where will the family invest the money it receives from the sale? Jonathan Oppenheimer has reportedly being pushing for widespread investment in Africa. And that was largely confirmed by his father who said: "Clearly we have a bias toward Africa, we are based in South Africa so we will be looking for opportunities here. We are looking for opportunities in Botswana where we have good connections and then elsewhere in Africa."

The family is said to be in talks with an Africa-focused body to establish a joint venture worth about $300 million. The family entered a joint-venture $300 million fund private equity fund with Singapore's Temasek Holdings in August. Over the past four years the family's investment arm E. Oppenheimer & Son has begun concentrating more on African investments outside the diamond industry, such as healthcare, agriculture, media, retail, at the instigation of Jonathan Oppenheimer. The family will maintain a stake of just under 2 percent in Anglo American as well as other investments such as a private equity business investing in mid-sized South African companies.

One analyst said that investing in Africa was fairly clear given that the continent is seeing strong economic growth. "Africa is growing at 6 percent per annum. It makes good economic sense," he said. There also exists the possibility that the family could return to the diamond business, after all the deal with Anglo American only stipulates that they stay away from the business for two years. "It's possible, of course," said a London-based source. "But given that the Oppenheimers are getting out of the trade for solid business reasons, it is difficult to imagine them coming back to it."

Indeed, it is claimed that it was the impact of the 2008 global financial crisis which led to deep divisions within the family over the direction their investments should take. Selling their stake to Anglo American, even at what some analysts estimated as a discount of around 25 percent, enables the Oppenheimers to preserve their fortune and enter new business areas where return on investment is higher and gained quicker.

The Oppenheimers' apparent disenchantment with diamonds is illustrated by the speed with which the family decided to exit De Beers having reportedly turned down informal offers from Anglo for its share of De Beers for some time. Financial market volatility and recession on the horizon reportedly worried some members the family, notably Nicky's sister Mary Slack, particularly after the family had already seen the Oppenheimers' net worth fell during the 2008 crisis.

The family had to pump millions into De Beers, which was forced to go cap in hand to shareholders as diamond prices slumped. "They had to put $400 million in cash into De Beers, which they didn't have. And they had to borrow that money against their stake in Anglo American," one source familiar with the family told the media.

The family was in a bind, since the stake in De Beers lost value and the family holdings outside De Beers were tied up largely in private equity, where exiting with a profit was some years away. That was led some family members, led by Slack, who has equal voting rights in the family, to question the Oppenheimers' continued involvement in De Beers. "She would have been observing this [financial crisis] and seeing their wealth really decimated. She was very uncomfortable with where everything was going," said the source.

De Beers has been fighting a huge battle against its debt problems for much of the past decade. Net interest bearing debt was $3.2 billion at the end of 2009 and $1.76 billion at the end of 2010, compared to 2000 when it had a net cash position of $1.35 billion. For the Oppenheimers, that was also likely to have been a convincing factor in deciding to sell off its share.

As for the future of De Beers, it has long since been a pioneer in bringing together diamond mining, trading and marketing. It also took its first steps in the retail sector a decade ago as it opened stores across the world in a joint venture with LVMH Moët Hennessy Louis Vuitton, the world’s leading luxury goods company and recently said it plans to open more outlets in China and the Gulf region. On expanding De Beers’ diamond retail business, Anglo American Managing Director Cynthia Carroll said it was too early to discuss what might evolve, but mentioned the strong upside potential in Asia.

Speaking to the media in November after the announcement that the Oppenheimers were selling to Anglo American, Carroll appeared to indicate that the prospect of a possible retail expansion was possible. Given that Anglo American will not be under financial strain as a result of the acquisition, some analysts suggest this means it will have resources available to expand De Beers' operations.

Even though the company will be able to pay the $5.1 billion price from cash holdings and existing credit facility, speculation continues that it might list De Beers, making it again a public company following its delisting in 2001. “We’re interested in the business as it stands right now, and taking it further,” Carroll said without elaborating. She expressed her confidence that the “iconic” De Beers brand would enable the diamond giant to capture the opportunities of the “rapidly evolving diamond market”.

The benefit of having Anglo American as a major shareholder in the current global financial climate is clear for De Beers, said a source close to the group. "While one will miss the Oppenheimer involvement, there is a strengthening of shareholders. Anglo has been an amazing shareholder in the recession," the source commented.