Xstrata’s Davis defends nil-premium bid

Allan Seccombe | Tue, 30 Jun 2009 15:23
[miningmx.com] -- MICK Davis, Xstrata CEO, defended his company's decision not to pay a premium for Anglo American claiming the proposed merger did not remove any optionality for Anglo shareholders.

Xstrata became the latest major mining group to step into the mergers and acquisitions (M&A) arena by telling the market Davis had submitted a letter to the Anglo board in June proposing a merger of equals.

Anglo rejected the proposal, saying it would dilute its superior suite of assets and that the terms suggest by Xstrata were unacceptable. A number of market commentators have suggested that without a premium, Anglo shareholders are unlikely to back Xstrata’s vision.

“If you have a combination of companies where both shareholder bodies survive, and the value to be gained out the merger comes from the merger, then there’s no optionality that’s been removed," he said.

Speaking to the Melbourne Mining Club in London on Monday night, Davis said there was "an intellectual purity" in the concept of a nil-premium merger of equals.

“It might not happen very often and you might not be able to do it if the other party doesn’t want to play with you. But as a concept, in terms of equal share of value and equal access to optionality, it’s not such a bad idea,” he said.

Davis there is a strong argument for the two groups to merge, creating a $70bn resources group, with a dominant position in platinum, chrome and thermal coal and zinc. It would be the second-biggest source of copper and metallurgical coal.

Ratings agency Fitch sees the combination of the two businesses in a similar light, saying a “variety of business benefits stemming from increased commodity and geographic diversification”.

Davis also spoke about Xstrata's abandoned bid in August 2008 to take over Lonmin, the world's third largest platinum producer, in a $10bn deal.

“I had to recognise we had done one transaction too many in our pursuit of growth," he said. "I had to face up to that fact, however galling it was. I had not been consistent in my thought process when we made the bid for Lonmin.”

While it was a good decision to shelve the bid, Xstrata followed it with a bad one by buying shares to give it a 24.9% stake in Lonmin, making it nearly impossible for someone else to buy the platinum producer.

“That wasn’t so smart because I should have recognised that if I had been consequential in my thinking I was looking at the implications that I did not need to do that because the world is dying and when the world is dying believe me there are very few people who want to act. Only a schmuck like me,” he said, referring to the virtual collapse in the financial sector late last year.

“So, we did one deal too far and abused the capital base just a tinge,” Davis said.

Opportunism and optimism

Davis, who has presided over a string of company takeovers since taking the reins at Xstrata in 2001, said it was quite typical for shareholders hostile to his company's overtures to label them opportunistic. But how else was one to conduct business, he said.

“I’ve always been interested that whenever we put down a proposal to buy a company, the response has been that this is an offer that is opportunistic and it’s an offer that doesn’t measure up to match the inherent quality of our portfolio,” he said.

“Opportunism seems to be a dirty word in the minds of people, for us it’s a value. If you have a clear idea of what your metrics are which will deliver value the only way you’ll get that value is by clutching at opportunities as they come past you,” he said.

“That’s what lies at the heart of the combination we’ve proposed to Anglo American, that it’s good for both companies in the environment we face to achieve greater scale and greater diversity.”

Davis said in his view China’s economy appears to have decoupled from the rest of the world and copper is a preferred commodity.

He recently gave a speech to a Merrill Lynch mining conference where he said he was wrong to suggest a year earlier there had been a decoupling of the Chinese economy from the rest of the world.

“But as I stand here today I think I was right. China’s economy has decoupled from the rest of the world. While the United States and Europe are still down and out, still wondering what they’ll do when they get up… China has moved forward prodigiously,” he said.

“Their investment plans have been executed and their demand for product has been re-engaged. It might well be they are restocking for some of it, but there is an element of new growth and demand,” he said.

Copper has the best fundamentals of the base metals because of its use in infrastructure projects. A number of projects have been stalled for a number of years because of the down turn in prices and it’s also a metal of which China doesn’t have a great deal.

In a speech heavily laced with cricketing analogies, Davis compared the hammering the commodity sector has received to a batsman who has to quickly re-establish confidence in his abilities after receiving a painful body blow or face going out.

Xstrata’s shares, like those of many other resources groups, were pummelled in the sharp reversal of commodity prices.

“Seeing your share price drop almost 80% almost overnight is a frightening, frightening phenomenon. It eats at your very insides in terms of your level of confidence,” Davis said. “We got up and reasserted our conviction that the supply side of the industry is still fractured and has an inability to meet demand.”