Xstrata trumpets Anglo merger benefits

WHILE Anglo American’s board has rejected a possible merger, Xstrata has released the proposal letter from its chief executive Mick Davis, revealing his view that a combined company could save $US1 billion a year and improve access to equity markets.
Xstrata trumpets Anglo merger benefits Xstrata trumpets Anglo merger benefits Xstrata trumpets Anglo merger benefits Xstrata trumpets Anglo merger benefits Xstrata trumpets Anglo merger benefits


Blair Price

Xstrata’s decision to release the letter could be seen as a move to pressure Anglo to reconsider a merger.

In his letter Davis said it was well accepted that the pursuit of scale and diversity as prerequisites for success had set the mining industry on an irreversible trend of consolidation.

He added the merged company would be well placed to compete with the likes of BHP Billiton, Rio Tinto and Vale.

“The recently announced iron ore joint venture between Rio Tinto and BHP Billiton is yet another milestone on this path,” he said.

“In future, only the largest and most diverse global mining groups will generate superior returns for their shareholders by gaining access to capital, the most attractive resources and the best talent, while better managing the increasing complexity and risk associated with our industry.”

For the transaction, Xstrata is seeking a 50:50 merger between the two companies, but Davis said he saw value in preserving, where possible, the efficient financial structure provided by Xstrata’s Swiss tax residence.

He also commented on the fund-raising difficulties provided by the ongoing financial crisis.

“Already this year, both Anglo American and Xstrata have successfully accessed the

international capital markets to repay or refinance existing borrowing.”

“Each company enjoys an investment grade rating. Nonetheless, despite these recent capital raisings and solid ratings, both companies remain capital constrained in the short term,” Davis noted.

“As one of the world’s leading mining companies, we are confident that the new group will immediately be able to access equity markets to raise further capital.

“The disposal of non-core assets, or the introduction of partners into one or more of the operations, are further potential sources of additional liquidity.”

Xstrata has conducted its own analysis and calculated a merger with Anglo would create core synergies of at least $US1 billion per annum just from combining the asset portfolios and not including the current savings Anglo has targeted with its own asset optimisation program this year.

The Swiss miner expects more than $458 million per annum in operational savings from the proposed merger, especially coming from the coal mining synergies in Australia and South Africa.

Another $237 million in savings each year was targeted from streamlining divisional functions and offices in the coal, copper and platinum group metals businesses.

Xstrata expects to save $209 million a year through synergies relating to the centralisation of other activities, covering areas such as insurance, exploration, technology and other corporate functions.

From Xstrata’s internal analysis, the combined market cap of the merged company would be $US66.90 billion.

Anglo’s board rejected the proposal early this week. The company said the offer would “profoundly impact the nature of the group’s portfolio by significantly diluting Anglo American’s unique exposure to the structurally attractive platinum, iron ore and diamond markets while increasing exposure to nickel and zinc”

The London-listed company, which began life in South Africa, said irrespective of the lack of strategic merit to the deal, Xstrata’s terms – which have not been made public – were “totally unacceptable”

Patersons Securities coal analyst Andrew Harrington has already weighed up the prospects of a possible hostile takeover of Anglo by Xstrata.

Harrington told ILN in broad terms it was going to be difficult to have a hostile takeover situation succeed as one of the major shareholders of Anglo American was the South African government.

He said Xstrata would need to get the nod from the South African government early on in the process, but that it would probably prefer to be involved with a heavily Africa-based company rather than a London-listed and Switzerland-based miner.

“I think you would have to make an attractive deal. A merger makes it sound like Xstrata is not paying much of a premium here.”

In his letter unveiled today, Davis said the merger proposal bore none of the characteristics of a takeover, in which a premium would typically be payable.

A merger between Xstrata and Anglo would create Australia’s biggest coal producer, with estimates of capacity starting at 80 million tonnes per annum.

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