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Sunday, June 21, 2009

Xstrata Seeks Merger with Anglo American

Xstrata Seeks Merger with Anglo American


LONDON -- Anglo-Swiss miner Xstrata PLC has made a bold merger approach to rival Anglo American PLC, an effort that underscores the competitive pressure facing miners but also faces steep odds of success.


Xstrata said in a statement Sunday that it had sent a proposal to Anglo's board seeking consideration of a merger of equals – a combination that would have a market value of more than $68 billion, displacing Rio Tinto as the world's third-largest miner after BHP Billiton and Brazil's Companhia Vale do Rio Doce.

U.K.-based Anglo, in a separate statement, said "this situation is at a very preliminary stage" and didn't provide other details.

Xstrata is expected to propose a deal that would put its management, led by Chief Executive Mick Davis, more in control of the combined company, which would be equally owned by both companies' shareholders, people familiar with the matter said.

Any deal, though, faces high hurdles. For one, Xstrata is not offering a premium for Anglo shares, and would be hard pressed to raise the money to do so. Also, any desire on Xstrata's part to take the lead in managing the new company will likely reduce Anglo's enthusiasm. Beyond that, a deal could face political headwinds in South Africa, where Anglo has significant operations.

Regardless of the outcome, Xstrata's move highlights the pressures facing miners, which are seeking to cut costs to keep pace with the dramatic downdraft in prices as a result of the economic downturn. Prices for many metals and minerals are 30% to 50% lower now than they were 12-18 months ago.

The merger approach also shows how smaller operators such as Xstrata are scrambling to get bigger to keep pace with larger rivals including Vale, BHP and Rio. Rio and BHP are seeking to merge their vast iron ore operations in Australia.

A merged Xstrata-Anglo would be the world's largest provider of diamonds, platinum, chrome and zinc, and the second largest copper producer, just behind Chile's Codelco. The two companies already have some joint operations in Latin America as well as platinum and palladium assets that are near one another in southern Africa.

Estimates of the cost-saving opportunities from putting the companies together vary, with some in the Xstrata camp putting them at more than $1 billion per year. "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 statement.

From Anglo's perspective, the benefits are less clear. People close to Anglo say the cost savings would be smaller, particularly in the companies' coal and copper operations. A merger would be more beneficial for Xstrata than for Anglo, one of the people said.

The strong performance of Xstrata shares in recent months has brought the companies' market values in line with each other, at about £20 billion ($33 billion) each – a fact that will likely lead Anglo's board to question whether this is an opportunistic approach from Xstrata's Mr. Davis. In late 2007, Anglo considered buying Xstrata, but decided against it.

Though Anglo's lagging share price has led to grumbling by some of its shareholders over the company's management, led by CEO Cynthia Carroll, its board may decide that the company's prospects as a standalone company are better, one of the people said.

Many of Anglo's shareholders and operations are also in South Africa, which would likely need to approve of any deal for it to succeed. A further complicating factor is Glencore International AG, the trading company that owns a big stake in Xstrata. Glencore would likely want the right to market key commodities from a combined Xstrata-Anglo, a demand that helped derail a recent takeover bid for Xstrata from Vale.

—Robert Guy Matthews contributed to this article.

Write to Dana Cimilluca at dana.cimilluca@wsj.com and Jeffrey Sparshott atjeffrey.sparshott@dowjones.com

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