Xstrata bids for WMC (October 28, 2004)

Swiss-based, diversified base metal miner Xstrata (XTA-L) has launched a hostile, all-cash offer for the world’s third-largest nickel miner, Australia’s WMC Resources (WMC-N).

Xstrata is offering A$6.35 (about US$4.73) in cash per WMC share, valuing WMC’s 287.5 million oustanding shares at US$5.85 billion.

The offer represents a premium of 25% and 29% to the volume-weighted average price for WMC shares over the last three and six months, respectively, and a 29% premium to WMC’s closing price on Oct. 26, 2004.

One huge proviso is that Xstrata expects that its offer will be fully funded in the debt markets.

“The combination of these two businesses would create a world-class diversified mining group, with greater scale to compete across global markets and excellent growth potential,” said Xstrata Chief Executive Mick Davis in a release. “Our offer price fully reflects the value of WMC in the current high commodity-price environment, the operational improvements underway at both Olympic Dam and the nickel operations, as well as the growth potential ofWMC’s assets as part of a larger group.”

He addded that the price includes material value associated with Xstrata’s unique ability to benefit from operational synergies at Mount Isa, cash benefits that flow from his company’s financial structure, and a reasonable estimate of potential cost savings from corporate overheads and efficiency improvements at operations.

WMC isn’t nearly so keen, saying that its board has “carefully considered the proposal and determined that it fails to recognize the current and prospective value of WMC’s assets and the strategic benefits to Xstrata or other potential acquirers.”

As a result, the WMC board has declined to put the proposal forward to its shareholders, but says it is still willing to have further discussions with Xstrata.

The market response to the proposed deal was dramatic: WMC soared US$4.87, or 31.5%, to US$20.35 in New York trading, while Xstrata dropped 59 pence, or 6.6% to 8.39 UK pounds in London trading.