Johannesburg/London - There is nothing intrinsically
valuable about diamonds. The fact that we think of them as precious is mostly
thanks to South Africa's Oppenheimer dynasty. It is they who, with a bit of
help from an American advertising man, sprinkled the rocks with romance and
convinced the world that diamonds are forever.
Which is exactly why the family's exit from the diamond
industry is all the more surprising. Africa's second-richest family, after
Nigerian food and cement tycoon Aliko Dangote, sold their 40% stake in De Beers
to Anglo American [JSE:AGL] this month for $5.1bn.
The decision means the dynasty involved in South Africa's
diamond industry for a century is finally getting out of the business.
"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," current De Beers
chairperson Nicky Oppenheimer told Reuters.
But stung by the global financial crisis and wrestling with
family discord over the direction their investments should take, the Oppenheimers
have sold out to preserve their fortune.
The family insist they still take decisions as one and say
they plan to invest "a large part" of the proceeds in Africa. One
banker familiar with the matter said the family was already in talks to start
another joint venture private equity fund, similar to the $300m fund set up
with Singapore's Temasek Holdings in August.
The odds are good that a big chunk of the $5.1bn will be
reinvested in Africa. Over the past four years the family's investment arm E
Oppenheimer & Son has begun concentrating more on African investments
outside the diamond industry - healthcare, agriculture, media, retail - at the
instigation of heir-to-be Jonathan Oppenheimer.
The family will maintain a stake of just under 2% in Anglo
American, as well as other investments such as a private equity business
investing in mid-sized South African companies.
Wealth under pressure
Headed by Nicky Oppenheimer, the clan is South Africa's
equivalent of the Rockefellers. The family mansion in Johannesburg - the
gardens are open to the public and require the services of 45 gardeners - has
housed generation after generation since 1922.
Critics say the Oppenheimers benefited under apartheid but
Harry Oppenheimer, who was De Beers' chairperson for 27 years, was hated by
many in the white political elite and ordinary Afrikaners, not least because he
supported the creation of black trade unions, provided housing for black
employees and encouraged education.
When former British prime minister Harold Macmillan made his
Winds of Change speech in South Africa's whites-only parliament in 1960,
drawing the wrath of the apartheid government, he was a guest at the
The family had long rebuffed informal approaches from Anglo
for its share of De Beers. But when chairperson John Parker tried again in
September, he found Nicky Oppenheimer more receptive.
The shift is a reflection of several pressures on the
family, not least turbulence in financial markets and recession clouds on the
horizon. That worried some in the family - particularly Nicky's sister Mary
Slack, according to mining industry sources - who had already seen the
Oppenheimers' net worth tumble during the 2008 crisis.
The family had to pump millions into De Beers, which was
forced to tap shareholders as diamond prices crashed. "They had to put
$400m in cash into De Beers, which they didn't have. And they had to borrow
that money against their stake in Anglo American," said one source
familiar with the family.
The family was in a bind. 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 years away.
This sparked 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.
Peter Major, mining analyst at Cadiz Corporate Solutions in
Cape Town, said he believes Slack had considerable sway over the decision to
exit De Beers.
"Mary's view must have been the deciding factor in
selling De Beers to Anglos. Without a doubt. It would then have been quite easy
for Nicky to make the decision once he saw how Mary weighed in."
Though diamonds have been among the best performing
commodities this year, sales have been hit by the global slowdown and fears
over the eurozone's debt crisis. There is no single marketplace for diamonds
and pricing is complex and opaque.
De Beers told investors in July that rough diamond prices
increased by around 35% in the first six months of the year. The company has
not disclosed exact price performance since then, but has said prices have
plateaued in recent months.
De Beers sells the bulk of its gems on what are essentially
long-term contracts, meaning it tends to feel market volatility less.
But other gem producers have seen steeper drops - small cap
miner Firestone Diamonds said in mid-September that prices had fallen 15% to
20% from the start of August as demand softened.
For De Beers, having Anglo American as a major shareholder
in the current global financial climate would be preferable, one source close
to the group said.
"While one will miss the Oppenheimer involvement, there
is a strengthening of shareholders. Anglo has been an amazing shareholder in
the recession," that source said.
De Beers has been battling a pile of debt for much of the
past decade. Net interest bearing debt was $3.2bn at the end of 2009 and
$1.76bn at the end of 2010, compared to 2000 when it had a net cash position of
Who takes over?
One of the most intriguing factors behind the decision to
sell is the issue of succession planning - tough for any family business and
even more so for the Oppenheimer's multi-billion pound empire.
Nicky Oppenheimer's heir-elect is his 42-year-old only son
Jonathan, educated at Christ Church, Oxford - like his father and grandfather -
and a 20-year veteran of several De Beers departments.
"Jonathan will certainly lead this process,"
Oppenheimer senior said. "I am after all 66; while I am active and not
retired, he is the man that is going to do the business."
But Nicky's choice, industry sources say, has not gone
unchallenged, particularly after Anglo American turned Jonathan down for a
board position after his father's departure and closed what is usually the
route to the De Beers chairpersonship.
Anglo has an effective veto over the chairperson's position.
Jonathan, his critics say, is less well-liked than his
father, while others question his ability to lead the firm.
One diamond industry source described Nicky Oppenheimer as
"totally blind" to his son's shortcomings and said others in the
family were unlikely to let him take the reins.
Nicky Oppenheimer declined to give details of the family
discussion,s but said the sale was a decision taken unanimously and the family
would continue to manage its wealth actively.