Anglo-Swiss mining company Xstrata plc (XTA.L,XSRAY.PK,XSRAF.PK) said Sunday that it recently sent a written proposal to the board of directors of rival Anglo American plc (AAUK: Quote,AAL.L), seeking their consideration regarding a merger of equals of the two companies. A combination of the companies could create a company with a market capitalization of about $68 billion and help compete better against mining giants Rio Tinto (RTP: Quote,RIO.L) and BHP Billiton (BHP: Quote, BLT.L).
U.K-based Anglo American has a current market capitalization of $35 billion, while Xstrata has a market capitalization of $33 billion. The merged company would thus overtake Rio Tinto, but still fall short of the market capitalization of the world's largest mining company BHP Billiton as well as that of Brazil's Companhia Vale do Rio Doce.
In a statement, Xstrata said, "Xstrata believes a merger of these two world-class companies with complementary assets is highly compelling. 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."
However, Xstrata said there was no assurance that any transaction will be forthcoming from its proposal, and added that any further announcement will be made if and when appropriate.
Xstrata is seeking to cut costs through a combination with Anglo American as it grapples with the drop in commodity prices amid the economic downturn. The merger offer also highlights the pressure faced by smaller miners as they struggle to keep pace with the larger mining companies. Earlier this month, mining giants BHP Billiton and Rio Tinto announced the formation of an iron-ore joint venture after Rio Tinto's board withdrew its support for a proposed $19.5 billion investment by the Aluminum Corp. of China or Chinalco (ACH) in the company.
Through the merger, Xstrata intends to gain control of the world's biggest platinum producer, Anglo American, and access to its iron ore mines. Also, Anglo American owns a 45% stake in De Beers SA, the world's largest diamond company. Synergies opportunities are seen through the merger of the two companies' coal assets in Australia and South Africa as well as their copper mining operations.
However, the deal could face several hurdles. Xstrata's merger proposal does not offer a premium to Anglo American's shareholders as it is seeking a merger of equals. Further, Anglo American's assets are believed to be of higher quality and having longer life than those of Xstrata. In addition, the deal could face resistance from South Africa, which is a major Anglo American shareholder and where the company has significant operations.
Xstrata has spent more than $27 billion in the last six years to add copper production in Chile, nickel mines in Canada, coal in Australia and platinum in South Africa. In 2008, the company dropped a hostile $10 billion bid to take over another platinum producer Lonmin plc.(LMI.L), citing extreme volatility in the financial markets and concern over financing the deal. However, the company later acquired a 14.2% stake in Lonmin for about $786 million in cash.
News of Xstrata's approach to Anglo American was first reported by the Sunday Telegraph, which said commodities group Glencore International, the holder of a 35% stake in Xstrata, was made aware of the approach and was thought to be supportive of a deal.
In early May, Xstrata reported that its coal output for the first quarter increased, whereas copper and gold output decreased amid lower prices. The company also said it repaid its then existing debt of $3.7 billion and strengthened its balance sheet from $5.9 billion in proceeds from a 2-for-1 rights issue held earlier.
On the other hand, Anglo American reported an increase of 22% in iron ore production for the first quarter, mainly due to the additional production delivered by its Sishen jig plant. The company also said that coal and diamond production were reduced in anticipation of lower demand.
In February 2009, Anglo American said that in order to tackle the challenging economic conditions, it decided to eliminate 19,000 positions by the end of this year and will suspended dividend payments.
XTA.L closed Friday's regular trading on the LSE at 681.00 pence, up 26.50 pence or 4.05% on a volume of 15.31 million shares. In the past 52 weeks, the stock has been trading in a range of 288.75-2,465.30 pence. XSRAF.PK last traded on Friday at $11.80, up $1.10 or 10.28%.
AAUK closed Friday's regular trading session on the Nasdaq at $13.33, up $0.33 or 2.54% on a volume of 1.48 million shares. The stock has been trading in a range of $6.21-$35.61 in the past 52 weeks. On the LSE, AAL.L closed Friday's trading at 1,623.00 pence, up 42.00 pence or 2.66%.
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by RTT Staff Writer
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