Xstrata Ponders Merger Options

Xstrata (XSRAF-O, XTA-L) could be gearing up for another run at the world’s third-largest platinum producer, Lonmin (LMI-L).

But investors will have to weigh whether Xstrata, with its hearty appetite for acquisition, will be more likely to zero in on a relatively smaller fish like Lonmin at the expense of going after the bigger fish, Anglo American (AAL-L, AAUK-Q).

A widely held view among observers is that Xstrata can only make a move for one of the companies.

Besides the obstacle of funding two such acquisitions, a three-way combination of Xstrata, Lonmin and Anglo American would quite possibly violate anti-trust law as the new entity would control over half of the world’s platinum supply.

With Anglo American continually stressing its distaste for Xstrata’s overtures, belief that Lonmin will be Xstrata’s new takeover target seems to have been behind Lonmin’s recent market run. The company’s shares began the month trading for just 13.89, but rumours of a takeover bid drove them up to a close of 17.12 in London on Sept. 8.

Despite the recent lift, the London- based company still finds its share price well off the 22 mark it was trading at just before Xstrata’s original offer in August 2008.

Despite that offer being for 33 per share — a 42% premium — Lonmin called the offer opportunistic, although it might have regretted its stance shortly thereafter.

While the logic behind Lonmin’s argument at the time was that its shares had been trading in the 34 range just a few months prior to Xstrata’s initial offer, its shares took a serious fall after Xstrata withdrew the bid a month later, and have stayed at a depressed level ever since.

While the financial meltdown of last fall and the corresponding drop in equity and platinum prices were seen as the reason for Xstrata bailing on its offer, U. K. law prevented the company from making an offer at a lower price until 12 months from the expiration of the initial offer.

That means the company is free to make another bid in October.

Xstrata currently has a 25% stake in of Lonmin.

Anglo rejected Xstrata’s 42-billion “merger of equals” idea two months ago for several reasons, including the fact that the offer came without a premium.