Xstrata triggers consolidation talk

Consolidation is the key word again in the base metal sector after Xstrata (XTA-L, XSRAF-O) tabled an offer for London-based Anglo American (AAL-L) on Sunday.

And while Xstrata tried to spin the deal as a merger of two equals, Anglo’s board was having none of it. Management at Anglo wasted little time in rejecting the offer.

“The strategic case for the combination is unattractive for Anglo American shareholders. Irrespective of this lack of strategic merit, the terms proposed by Xstrata were totally unacceptable,” Anglo said in a statement.

Anglo considers the strategic case unattractive because of the economic strength of its projects relative to Xstrata’s, and its disdain for the terms of the proposal was connected to a lack of a premium being offered by Xstrata.

The value of a combined company, without any premium, would be US$68 billion.

And while Xstrata touted increased scale and cost synergies as key benefits to the merger, the absence of a premium indicates it was counting on a high level of Anglo shareholder discontentment to see it through.

Such discontentment is believed to have been simmering since Anglo cancelled its long standing dividend payment in February of this year.

Despite Anglo’s hasty rejection of the offer, its shareholders may be enticed over by a sweetened offer, as the consensus on the Street is that significant synergies are to be had by a merged company – especially in South Africa, where both companies are very active

Some analysts were pegging the cost savings of a combined company between US$700 and US$875 million a year.

But even such strong fundamentals were being undermined at the outset of the proposal as the South African government said it was cool on a merger because of what it might mean for mining jobs in a country with already high unemployement.

A mining official in South Africa said the government would look into the possible violation of anti trust laws should the merger proceed.

Job losses were already sustained when lower base metal prices led Anglo to shed some 19,000 jobs back in February — at the same time it announced the end to its dividend.

Even if the two companies do combine, their market cap of US$68 billion would pale in comparison to BHP Billiton (BLT-L, BHP-N, BHP-A), and it would only rank fourth amongst base metal producers.

BHP has a market value of US$144 billion. Brazilian miner Vale(VALE-N) is worth US$93 billion, while Rio Tinto (RIO-L, RTP-N) is worth US$74 billion.

Earlier this month BHP and Rio Tinto agreed to combine their Australian iron ore operations in a joint venture.

Within mining circles it has been no secret that Xstrata has long looked at Anglo as a potential partner.

“The combination would create a premier portfolio of operations diversified across multiple commodities and geographies, with enhanced scale and financial flexibility to fund future growth,” Xstrata said in its initial release.

But whether it is able to step up and win over Anglo shareholders, or whether Vale renews its previous efforts to acquire Xstrata, remains to be seen.

What is clear is two large base metal producers are now in play, with even one of their largest shareholders being rumoured as a possible acquirer.

Privately held Zug-Switzerland based metal trader Glencore — which holds a 35% stake in Xstrata — has been rumoured to be considering a reverse takeover of the company.