A takeover tussle between the two mining giants ended as Xstrata walked away without raising its price. But analysts say it may try again later
Anglo American (AAL.L) declared Xstrata's interest in the group "dead and buried" yesterday after the mining giant walked away from its proposed merger having failed to win enough support from Anglo's shareholders.
Xstrata (XTA.L) moved before next Tuesday's "put up or shut up" Takeover Panel deadline, confirming the view that the deal was likely to stall. The company will now be unable to approach Anglo for at least six months, although several analysts argue that a renewed bid is likely.
The deal never got off the ground with Xstrata always running behind schedule after details of the approach, which the group had hoped would remain informal and secret, were leaked in June. Since then, Xstrata has tried to convince Anglo's shareholders that synergies of £1bn a year from cost savings and efficiencies alone justify the merger, with chief executive, Mick Davis, steadfastly refusing to offer a premium.
"My letter to the board of Anglo American was intended to commence confidential discussions to explore the potential to merge Xstrata and Anglo American and create a new mining super-major with the scale and diversity to compete in the evolving global mining sector," Mr Davis said yesterday. "It is regrettable that the board of Anglo American immediately rejected our approach, without engaging...to investigate the potential to create more value than either company could alone."
The deal's collapse is a victory for Sir John Parker, Anglo's chairman, who has spent the first months of his tenure meeting shareholders to gauge their reaction to the approach. Despite some investors, including BlackRock (BLK) and Capital Group, highlighting the potential savings, Anglo's confidence grew in recent weeks, with the miner dismissing the merger talks as a "distraction".
"The board continues to have full confidence in the value inherent within the group's unique asset base and the additional value that we can drive from it. I look forward to working with the management team to deliver this value for our shareholders," Sir John said in a statement. "Anglo can now move forward, run our business without further distraction and deliver significant value for the benefit of our shareholders."
Xstrata's decision to give up on the merger may only be temporary, however. The group has maintained that its wooing of Anglo investors could take as long as three years and several industry analysts argue that a renewed tilt at Anglo still remains an option for Xstrata. The company is set to benefit in the shorter term from higher prices of its two main commodities, copper and coal, but is expected to suffer falls in earnings as other commodities become more attractive later in the cycle. Indeed, one of Anglo's strongest arguments was that it is already a diversified miner.
"Clearly there is a deal to be done given the cost savings and economies of scale a combined group could create," Jonathan Jackson, the head of equities at Killik & Co, said. "Anglo's shareholders wanted a premium, but Xstrata has been constrained. If we get another six months of strong markets and Xstrata gets some cash behind it, this deal could be back on, especially if Anglo's restructuring plans do not work out."
A source close to Anglo American conceded that its chief executive, Cynthia Carroll, is under pressure to create more value for shareholders, and that Sir John is "providing air cover for her". Anglo has promised to make $2bn (£1.22bn) in savings by 2011, indicating that much of the money would be returned to investors.
Xstrata could now turn its attention to Lonmin (LMI.L), the world's third biggest platinum miner, which it tried and failed to buy last year. The group owns a 30 per cent stake, but yesterday described reports of a new offer as a "red herring".