Swiss mining giant Xstrata must have forgotten to play the mood music and properly woo rival Anglo American
On Monday, Anglo American issued a press release conveying the Board's staunch opposition to the merger, opining that the "strategic case for the combination is unattractive" for shareholders, and adding that the terms of the merger of equals offer were "totally unacceptable."
For starters, Anglo appears quite content with its level of exposure to precious materials like platinum and diamonds. It owns a 45% stake in the world's No. 1 diamond producer, DeBeers, and the group's Anglo Platinum subsidiary enjoys the top spot in platinum with an incredible 39% of global production.
Citing strong market fundamentals for such precious assets, versus relative weakness in base metals, Anglo feels that an Xstrata combination would dilute that advantageous asset mix with unwanted additional exposure to materials like nickel and zinc. While I see some merit to this argument, I find it a bit hard to swallow a strategic commitment to a precious portfolio when the company recently divested more than $1.8 billion worth of gold exposure (including its legacy stake in AngloGold Ashanti
I pointed out Monday that an Xstrata / Anglo pairing would also dilute the benefits of Anglo's cost-cutting initiatives, which are expected to save $2 billion annually. Xstrata's zero-premium offer would have failed to compensate Anglo shareholders for that looming benefit, and in any event came nowhere near the going rate for successful mining mergers of about a 30% premium over market price.
The promptly thwarted advances from Xstrata fed immediate speculation about other potential suitors for Anglo American. Fresh from its own spurned bid to acquire a substantial stake in Rio Tinto
In this small community of global megaminers, where it seems everyone makes a pass at everyone else in search of coveted economies of scale at one point or another, suitors had better place their best foot forward on the opening advance, or face a swift cold shoulder like the one Anglo turned to Xstrata.