[miningmx.com] — Vic de Klerk and David McKay write about the whys
and won’ts of a possible tie-up between a future Glencore Xstrata and Anglo
American.
ANGLO AMERICAN AND XSTRATA ARE STILL EQUALS
Vic de Klerk
“IT MUST and will be a merger of equals,’ was Mick Davis’s motivation in October
2009 for a proposed tie-up of Xstrata and Anglo.
“No chance,’ was Anglo CEO Cynthia Carroll’s immediate response. She was opposed
to the takeover bid – which Davies wanted to look like a merger – because Anglo had
much better assets than Xstrata.
More than two years have passed, and financial markets are now rife with rumours
and suggestions that Anglo may merge with or be taken over by somebody after all.
This week it was announced that Xstrata would be merging with Glencore.
Davis was, however, quite right more than two years ago: Xstrata and Anglo are
equals and neither needs to accept a premium or discount on its current share price
if a merger does in fact materialise.
The share prices of Xstrata and Anglo have followed each other over the past two
years. The market shows that they are not only “equals’, but also, in fact, identical
twins.
Cynthia Carroll’s counter argument is, of course, also partly true. The share prices of
the bigger mining houses tend to follow each other, and a simple graph showing that
the market regards them as equals does not always tell the whole story.
Still, the total market values of Anglo and Xstrata are currently so close to one
another that they may just as well bed down together.
rocky marriage
David McKay
IT’S PERHAPS a tad early to consign Anglo American to extinction. Sources close to
the company said its executives barely raised an eyebrow when it was announced
that Glencore was merging with Xstrata.
“It was a well-known event. We knew it was coming,’ says a source close to the
company. Just because Glencore is merging with Xstrata, and Xstrata once wanted
to merge with Anglo American, doesn’t mean that situation will be revisited.
In any event, it’ll be no easy feat absorbing Anglo American into Glencore/Xstrata
either, assuming the newly created giant even wants Anglo American – a company
without significant iron ore resources; something in which Glencore/Xstrata is also
relatively short.
According to Peter Davey, an analyst at Standard Group Securities in London, Anglo
American also owns assets that Glencore – which likes to buy mineral assets it can
also trade – cannot trade, such as diamonds and platinum. Then there’s the
increased exposure to South Africa with all its regulatory uncertainty, troubled ore
bodies and disgruntled labour to think of. Does Glencore/Xstrata consider these
assets as value-enhancing when its balance sheet makes it capable of zeroing in on
other quarry?
Better to consider the assets that Xstrata/Glencore might itself deem non-core.
That’s the first benefit of the two companies joining forces. Apart from removing the
cross-holding between the two, the merger allows Xstrata and Glencore to weed out
the assets it would rather not keep. Perhaps Lonmin, in which Xstrata has a 24%
stake, is one of them. Or even the platinum assets, including the former Eland
Platinum, also in SA?
According to Credit Suisse, the merger of Glencore and Xstrata provides synergies on
the marketing side of both businesses, which could save as much as $500m for the
first financial year. That would have to be worked out first.
For its part, Anglo American has other struggles with which to contend, including its
battle with Codelco. The Chilean state-owned copper producer is pressing criminal
charges against Anglo American for selling a 24.5% stake in Anglo American Sur, over
which Codelco says it has a valid option agreement that was exercisable in January.
Anglo has delivered a stern assessment of the situation.
While the company is still seeking a commercial negotiation with Codelco, it’s
forthright on its legal position. Says Peter Whitcutt, Anglo’s Group Director: Strategy
and Business Development: “They [Codelco] completely ignored our legal rights.
“They have created a sound and fury or they would have looked foolish. But in the
cold light of day, they would be advised to seek an outcome.’
– These articles first appeared in Finweek. If you want to subscribe to the digital
format of Finweek visit www.zinio.com.
