Xstrata has less than three weeks to decide whether to turn hostile in its pursuit of rival miner Anglo American, but analysts believe it lacks the financial firepower to conclude a near-term deal. Under Friday's "put up or shut up" ruling by UK regulators, Xstrata Plc must make a formal take-over offer by October 20 or undertake not to return before April, when it might be better placed to make a winning bid if commodity markets continue to recover.
A combination of the two firms would create the world's biggest producer of zinc, platinum, coal for power stations and ferrochrome, and the second-biggest in coal for steelmaking and copper. Analysts believe Xstrata, saddled with $13.1 billion of debt, currently has insufficient financial muscle to ditch the "merger of equals" plan it has placed on the table and offer Anglo shareholders the premium they are seeking.
"We think it unlikely that Xstrata will 'put up' by 20th October. They have made it clear to shareholders that whilst they remain interested in the deal they don't want to bump the terms," Michael Rawlinson at Liberum Capital said. But Xstrata's portfolio of metals means its earnings are likely to outperform its rival's in coming months and brighten its financial situation, analyst Nick Hatch at ING said.
"On balance, we think that Xstrata will walk away, but return its attentions to Anglo American in six months' time... Better commodity markets should result in an Xstrata balance sheet that could allow for a cash sweetener in a new merger proposal."
One of Anglo's biggest units is Anglo Platinum which is struggling to make a profit, while Xstrata is the world's biggest exporter of coal for power plants, a sector in which prices have held up better than in many other commodity markets. Xstrata has said a merger would benefit both sets of shareholders with estimated synergies of at least $1 billion.
Anglo, which reiterated its rejection of Xstrata's approach, exercised its rights under UK take-over legislation to ask the regulator to ask officials to force Xstrata into a making a decision. "Xstrata must, by 5.00 pm on 20 October 2009, either announce a firm intention to make an offer for Anglo American... or announce that it does not intend to make an offer," the Take-over Panel said in a statement.
Xstrata gave no hint about what its decision would be. It said in an emailed statement it noted the announcement and would respond accordingly. Xstrata's shed 4.6 percent to 832 pence by 1106 GMT as investors worried it might offer a premium, though Anglo shares rose just 0.4 percent to 1,894.5. The UK mining index fell 1.7 percent as metals prices slipped.
Anglo's new chairman John Parker has been consulting with shareholders about Xstrata's "nil premium" merger proposal, which the firm said was "totally unacceptable" on June 22, one day after Xstrata unveiled the plan. "Nothing since then has changed the board's view and the board reiterates its emphatic rejection of Xstrata's approach," Anglo said in a statement. "Anglo American believes it is in the interests of the group and its shareholders that this period of uncertainty is brought to an end." That view was supported by a major Anglo shareholder.
"I think it is in the interests of both parties that we finally move away from a stalemate for an indefinite period. This means Xstrata has to come back with an improved offer ... or walk away," said fund manager Anwaar Wagner at Old Mutual Investment Group in South Africa.
Old Mutual, South Africa's largest insurer, has a stake of 3 percent in Anglo. Xstrata has said it wants to engage with Anglo management to discuss synergies, which it said would come on top of an Anglo programme to cut cost by $2 billion by 2011.
Xstrata also says that bringing together the fourth and fifth biggest diversified mining firms by market value would create a group better able to compete against rivals BHP Billiton and Rio Tinto. An Anglo-Xstrata combination would have a market value of $80 billion based on Thursday's closing share prices, versus BHP's $168 billion and Rio's $94 billion.
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