Anglo Turns Down Xstrata, But Other Suitors May Beckon
Forbes Staff 06.22.09, 8:15 PM ET
Dance on? Anglo American has rejected a $67 billion, nil-premium, all-share "merger of equals" with rival mining group Xstrata.
But that does little to alter market perceptions that both companies are now in play, with Brazil's Companhia Vale do Rio Doce and Chinalco, recently spurned by Rio Tinto, likely to look hard at both.
In a statement, the London-listed, South Africa-based mining group dismissed the merger proposal as lacking "strategic merit" and said that "the terms proposed by Xstrata were totally unacceptable."
Switzerland-based Xstrata countered by saying that it was "surprised that the Anglo American board has not seen fit to engage with Xstrata to discuss our proposal in view of the substantial value for both companies' shareholders that would arise uniquely from a merger of the two companies."
Anglo's shareholders are looking for a hefty premium for Anglo's iron ore, platinum, coal and copper assets, which Xstrata covets to give it the sort of economies of scale enjoyed by larger rivals BHP Billiton and Rio Tinto.
As a rule of thumb, successful mining mergers usually require a 30% bid premium. Even allowing for Anglo's recent lackluster share performance and potential cost savings in the combined businesses, and assuming that Anglo's shareholders could capture all that value, a merger of equals would be a giveaway, with Xstrata doing the taking.
Another damper on the deal: the government in South Africa, where Anglo has the bulk of its mines, says it's concerned about the impact on workers and anti-trust issues from the possible combination.
A combination of the two firms would create the world's biggest producer of zinc, platinum, coal for power stations and ferrochrome, and the No. 2 player in coal for steel-making and copper.
Xstrata's options now are to sweeten its proposal by offering cash, take its case to Anglo's biggest shareholders, some of whom are more positive on the proposed merger than Anglo's management, or dance with another suitor.
Anglo shares rose 12% in early trade Monday but fell back to close 4.6% higher at 1,698 pence before Anglo issued its statement. Before Monday, Anglo shares had underperformed the British mining index by 20% this year. Shares in Xstrata closed down 6.7% at 635.1 pence.
Anglo is being advised by UBS and Goldman Sachs. JPMorgan Cazenove and Deutsche Bank are advising Xstrata.
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