Xstrata Offers ‘Merger of Equals’ With Anglo American (Update3)

By Lindsay Fortado

June 21 (Bloomberg) -- Xstrata Plc, the largest exporter of coal used by power plants, proposed a “merger of equals” with Anglo American Plc to gain access to iron ore mines and control of the world’s biggest platinum producer.

“A merger of these two world-class companies with complementary assets is highly compelling” and would provide “enhanced scale and financial flexibility to fund future growth,” Zug, Switzerland-based Xstrata said in an e-mailed statement today.

Xstrata Chief Executive Officer Mick Davis wants to combine with Anglo to make cost savings from joining operations and continue an acquisition spree in which the company has spent more than $28 billion in the past six years on nickel, copper, coal and platinum assets. A combination would create a company with a market value of about 41 billion pounds ($68 billion).

A tie-up “makes a huge amount of sense,” said Michael Rawlinson, an analyst in London at Liberum Capital Ltd. “The problem is that Anglo American is being very resistant to the idea,” he said. Rawlinson has a “buy” rating on Anglo American shares.

Talks are “at a very preliminary stage, and there is no certainty that any transaction will be forthcoming,” London- based Anglo American said in a statement today. It didn’t identify terms of a possible deal.

Anglo American investors want Chief Executive Officer Cynthia Carroll to study a merger with Xstrata, the London-based Times reported on June 15.

‘Market Will Cheer’

Glencore International AG, which holds a 35 percent stake in Xstrata, is supportive of a transaction, the Sunday Telegraph reported earlier today.

“I think the market will cheer” a merger, said David Shapiro, who heads Sasfin Holdings Ltd.’s securities unit in Johannesburg and owns Anglo American shares. “In the last few months we’ve started favoring other companies. They haven’t given us the kind of value we want,” he said.

Anglo American is the worst-performing stock this year in the 14-member FTSE 350 Mining Index, which has gained 33 percent.

Anglo American rose 2.7 percent to 1,623 pence in London on June 19, valuing the company at 21.4 billion pounds. The stock has gained 5 percent this year.

Xstrata climbed 4.1 percent in London to 681 pence, valuing the company at 20 billion pounds. The shares have jumped 88 percent this year, giving it a market value of 20 billion pounds.

‘Global Leader’

Analysts at Citigroup Inc. said in a June 18 report that an Xstrata and Anglo American combination “makes strategic sense and could create synergies of up to $750 million per annum.” A merged company “would be a global leader in base metals, platinum, ferrochrome and coal,” they wrote.

“The combination would create a premier portfolio of operations diversified across multiple commodities and geographies,” Xstrata said in its statement. “Optimization and reprioritization of the combined company’s organic growth pipelines would significantly increase shareholder returns,” it said.

Goldman Sachs Group Inc. and UBS AG are advising Anglo American, while Deutsche Bank AG and JPMorgan Cazenove are advising Xstrata.

To contact the reporter on this story: Lindsay Fortado in London at lfortado@bloomberg.net