Analysts mixed on Anglo-Xstrata marriage

David McKay & Ines Schumacher | Mon, 22 Jun 2009 12:24
[miningmx.com] -- SOUTH African analysts shelved feelings of sentiment on Monday, saying they supported the merger of the 91-year old mining group, Anglo American with Xstrata, its seven-year old London rival.

Others believed the transaction might be snagged by regulatory problems and around questions of value. The view of the South African government has also not yet been heard - a vital question that could affect the way Xstrata's bankers structured a possible merger.

Xstrata confirmed on Sunday it had proposed a R550bn (Ł41bn) merger with Anglo American. Anglo said it had been approached without providing details.

Anglo’s share price hit the straps in early Monday trade, climbing 12% in London before falling back to post a 6% increase by midday. The share was last trading at R229.60/share. Analysts said that while the bid was not exactly “a surprise”, it was nonetheless well supported.

About a quarter of Anglo American’s share register was South African, including a 5% holding by the government's Public Investment Commission (PIC), which may have protective feelings towards a company that forms a vital part of the country’s corporate history.

However, the growing view is that Anglo American’s top heavy management structure – one of the impediments to business that Cynthia Carroll, the group’s CEO, was tasked with removing – continues to hold it back.

It is thought that Mick Davis, Xstrata CEO, would impose a lighter, fleeter-footed management structure.

There are about 2,000 employees at Anglo’s Johannesburg head offices (including employees at listed subsidiaries, Kumba Iron Ore and Anglo Platinum) compared to about 50 at Xstrata’s London and Zug (Switzerland) offices.

“Xstrata has been built on consolidation. It has been lucky in that this was done during a secular upswing in demand for commodities,” said one analyst who could not be named.

He added that Xstrata was better at managing assets than the Anglo American team. “This is a group that knows how to sweat assets. You rarely see technical problems on its mines and it has been swapping out its weak assets for much stronger ones,” he said.

Analysts speaking to Miningmx on Sunday suggested that while Xstrata has performed incredibly well building itself from zero in 2002 to a company the value of Anglo, it was nonetheless a much weaker company than Anglo in terms of its assets.

Good for SA?

There were voices of dissent, however, with some analysts saying the merger of Anglo American with Xstrata would not be good for South Africa.

"South African shareholders are in a unique position because they only hold Anglo American shares," said a local Anglo American shareholder.

"A deal with Xstrata would have to unlock value for South African shareholders. At the right price this would unlock value," he said. The current share price movement is insufficient to unlock value, he added.

One complication is whether the merger would involve a swap of shares - most likely - as South African funds would then have to divest of some of their offshore share entitlement in order to retain their exposure to the combined Anglo/Xstrata.

"South Africans would probably like Anglo American's assets to stay under South African control," he said.

Liston Meintjes, CEO of Abercrombie Asset Management, said the merger would be snared by a plethora of value questions. Would Anglo American shareholders be getting value by merging with a company that had lesser assets, he said.

"The logical outcome here is of joint ventures [between Xstrata and Anglo American," said Meintjes.

Peter Major, an asset manager for Cadiz Corporate Solutions, said joint ventures between Xstrata and Anglo would be "a much more palatable solution". It would give Carroll some "breathing space".

BHP Billiton and Rio Tinto recently combined their iron ore assets in a single joint venture.