Xstrata/Anglo scenarios

Reuters | Mon, 22 Jun 2009 13:03
[miningmx.com] -- Xstrata Plc has made an approach to mining rival Anglo American Plc seeking talks about a possible merger, sending Anglo shares surging by as much as 12 percent.

Here is a summary of what might happen next:

ANGLO AGREES TO TALKS

Anglo might accept talks with Xstrata if it feels under pressure from shareholders to engage with Xstrata about a deal that might result in lower costs and a bigger group better able to compete with the likes of BHP Billiton Ltd/Plc and Rio Tinto Ltd/Plc.

Anglo, which suspended its final 2008 dividend, could be vulnerable as its shares have underperformed Xstrata's by about 45 percent this year. A deal would likely be structured as an all-share swap, since Xstrata does not have a strong enough balance sheet to raise cash in the current market.

Analysts have estimated cost savings at between $700 million and $875 million a year. Bank of America-Merrill Lynch said Xstrata could offer a 30 percent premium for Anglo under a 3.2-for-1 share ratio.

If the two groups link up, Xstrata would likely sell its 24.9 percent stake in No. 3 platinum producer Lonmin Plc since regulators would not allow a combination with Anglo's Anglo Platinum Ltd, No. 1 in the sector.

An alternative to a full merger would be to establish global joint ventures in coal and copper, like BHP and Rio did in iron ore.

ANGLO RESISTS APPROACH

Anglo may resist merger talks with Xstrata, since it regards its assets as being higher quality and with longer lives. It is also likely to be wary of agreeing to a deal at the bottom of the cycle and in the midst of its own cost-cutting drive that seeks to squeeze out $2 billion in savings through procurement and making assets operate more efficiently.

A "merger of equals" involving a balanced distribution of management responsibilities may not be achievable since the two companies operate with completely different structures -- Anglo is highly centralised while Xstrata devolves responsibility to unit chiefs in the field.

Anglo is likely to accelerate its search for a new chairman who could give shareholders confidence that Anglo could pull its weight as a stand-alone group.

The key question Xstrata may have to face would be whether it is prepared to go hostile if Anglo resists. But a hostile bid would be fraught with difficulties, due to Anglo's stance as a national champion in South Africa and possible government opposition to an unfriendly move.

South Africa's new President Jacob Zuma has close ties to trade unions, which could fear job cuts as a merged group seeks to reduce costs.

But Xstrata Chief Executive Mick Davis is South African and may offer the government to transfer a stake in the combined group to a group of black investors as part of the country's Black Economic Empowerment programme.

RIVAL SUITORS?

Brazil's Vale SA, the world biggest iron ore producer, may be interested in Anglo after talks about acquiring Xstrata fell through last year. A deal would give Vale more diversification both in terms of geography and types of commodities, boosting exposure to coal and copper.

Anglo might seek a Chinese white knight after it sealed a strategic alliance with the China Development Bank in February 2008 to develop mining projects.

A wild card could be Xstrata's biggest shareholder, Swiss commodities trader Glencore, which holds a 35 percent stake and which the Financial Times said was exploring a stock market listing.

Following Sunday's announcement by Xstrata about Anglo, some industry sources speculate the two moves may be linked and all three groups could eventually get together, or there was a twin process underway.