Justin Sutcliffe
Mining group Xstrata Plc gave up pursuing rival Anglo American on Thursday, dropping a merger of equals proposal that would have created a group with a combined market value of $96-billion (U.S.) after it refused Anglo shareholders' demands for a premium price.
Xstrata said it still believed in the strategic rationale of a merger with Anglo and left the door open but was being "disciplined."
Anglo's shares were down 2.3 per cent at 2,257 pence by 0927 GMT, while Xstrata was off 1.2 per cent at 1,019 pence, giving each company a market value of about $48-billion.
"The hostility with which the Anglo board views Xstrata meant no deal was possible without a material transfer of value from Xstrata to Anglo shareholders," said Michael Rawlinson at Liberum Capital.
"The pressure is now on (Anglo's chairman) Sir John Parker to deliver the promised changes at the company."
UK regulators issued a "put up or shut up" order last week compelling Xstrata to either make a formal offer by Oct. 20 or walk away for at least six months.
"Our decision not to proceed with an offer before the deadline imposed by the UK Takeover Panel reflects our disciplined approach to growth and our focus on the value proposition for Xstrata's shareholders in a merger," chief executive Mick Davis said in a statement.
"We continue to assess a range of alternative growth options, in full recognition that transactions of this nature often take time and patience to mature."
Xstrata also announced on Thursday that its board had approved two projects worth $700-million.
The ATCOM East coal project in South Africa will cost $407-million and the group would spend $293-million to increase the life of its Lomas Bayas mine in Chile by eight years.
"Dead and Buried"
A combination of Xstrata and Anglo American would have created the world's biggest producer of zinc, platinum, coal for power stations and ferrochrome, and the second-biggest company in coal for steelmaking and in copper.
Xstrata had said a merger would benefit both sets of shareholders with estimated synergies of at least $1-billion.
It also said that bringing together the fourth and fifth biggest diversified mining firms by market value would create a group better able to compete against rivals BHP Billiton and Rio Tinto.
But Anglo said the approach was "totally unacceptable" on June 22, one day after Xstrata unveiled the plan, and welcomed Xstrata's announcement on Thursday saying it could now move forward without the distraction of a merger battle.
"The proposed 50-50 merger never gained any momentum with Anglo shareholders and the idea is now dead and buried," an Anglo spokesman said.
"Today's announcement was inevitable because Anglo's shareholders rejected both the poor strategic logic and underwhelming valuation of Xstrata's proposal."
Analysts said Xstrata, saddled with $13.1-billion of debt, had insufficient financial muscle to offer the premium of up to 30 per cent demanded by some Anglo shareholders.
A source close to the situation said earlier this week that veteran industrialist Sir John Parker's appointment as Anglo's new chairman on Aug. 1 had also proved to be a key factor in the bid battle.
Conducting a round of consultations with shareholders about the "nil premium" merger proposal, investor sources said Mr. Parker had persuaded those who had been leaning towards supporting Xstrata to give Anglo more time instead to conclude its own restructuring program, that is due to cut costs by $2-billion by 2011.
"I think he has changed the dynamics entirely. The institutions know John very well and they understand that he is a man who delivers," the source close to the situation said.