Are we seeing the start of a new mergers boom?

Jun 26, 2009

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Anglo-American this week rejected a proposal for a "merger of equals" from its Swiss rival Xstrata, calling it "totally unacceptable". A combination of the two groups would make the new entity a mining giant with a market capitalisation of around £40bn and a global leader in base metals and platinum. But Anglo indicated that it is not averse to a deal in principle.

What the commentators said  

Xstrata was "never going to get away with its cheeky" proposal, said David Wighton in The Times. Anglo's shareholders would "rightly demand a takeover premium" for relinquishing control of its "attractive platinum, iron-ore and diamond assets".

A takeover target can usually expect a 25%-30% premium, said Lex in the FT. Yet it seems unlikely that the cost savings from the deal will create enough value to offer Anglo a decent premium. Moreover, neither Xstrata nor its main shareholder, Glencore, have much cash on hand to sweeten the deal, said Matthew Curtin in The Wall Street Journal.

In any case, achieving cost savings requires managements agreeing on how to structure the new company, and "there are glaring differences in outlook and management approach" that would make "formidable obstacles" to any deal, said William MacNamara in the FT.

The South African government could well block a tie-up on job losses or antitrust concerns, added Lex. The upshot of Xstrata's Anglo approach may be that it will "re-awaken" Brazilian miner Vale's interest in it, while there are rumours that Chinese mining group Chinalco is keen to pursue Anglo. The deal making cycle, said Economist.com, "is clearly on an upswing".

AAL: £17.40; 12m change -52%
XTA: £6.60; 12m change -73%

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