Mining group Xstrata plots merger with Anglo American

By Mark Kleinman and Louise Armitstead
The Sunday Telegraph, London
Sunday, June 21, 2009

http://www.telegraph.co.uk/finance/newsbysector/industry/5589081/Mining-...

The mining group Xstrata has approached its rival Anglo American about a L41-billion merger that would create one of the world's leading natural resources companies, The Sunday Telegraph has learnt.

Mick Davis, Xstrata's chief executive, is understood to have written to the board of Anglo last week to propose opening discussions about a deal. It was unclear last night whether Anglo had made a formal response to the approach. Goldman Sachs and UBS, the investment banks, are advising it on the situation. Deutsche Bank and JP Morgan Cazenove are advising Xstrata.

Xstrata has not yet outlined the terms on which it believes a deal would be acceptable to Anglo, but the companies' market capitalisations -- Anglo is valued at L21.3 billion and Xstrata at L20 billion -- suggest that a merger of equals is plausible amid intense speculation about a fresh wave of mining industry consolidation.

Analysts believe a merger of the two companies would make sense because of the vast cost synergies potentially available to a combined group.

Anglo and Xstrata have complementary coal assets in Australia and South Africa, and there are potential savings across their copper mining operations.

Nomura, the Japanese investment bank, has said that a merger could achieve savings of $700 million (L423 million) a year.

"Anglo may be facing an identity crisis that could leave the company vulnerable to takeover," analysts at the bank said. They suggested that the company's decision to suspend its dividend and sell its remaining 11 percent stake in AngloGold Ashanti earlier this year "may mark the end of the old Anglo."

Glencore, the commodities group which holds a 35 percent stake in Xstrata, is understood to have been made aware of the approach to Anglo and is thought to be supportive of a deal. Vale, the Brazilian miner that in the past held abortive talks about a takeover of Xstrata, is also being tipped as a potential buyer for Anglo.

If a merger between the two companies can be completed, it would be among the biggest corporate transactions undertaken globally this year.

The approach from Xstrata comes as Cynthia Carroll's hold on the chief executive's role at Anglo is looking increasingly tenuous. Some of Anglo's leading shareholders have turned their guns on Ms Carroll, accusing her of overpaying for recent acquisitions.

Anglo has also been rocked by a boardroom row over the appointment of a new chairman. Some directors of the company opposed the appointment of Sir John Parker, the respected industrialist, because they wanted a South African to take the helm.

Headhunters have now drawn up a short list, which is understood to include several European executives.

Securing a merger with Mr Davis's group would enable Sir Mark Moody-Stuart, the outgoing chairman of Anglo, to depart on a high note, although Ms Carroll has argued that Anglo can generate better returns for its investors by remaining independent.

The approach to Anglo comes weeks after Rio Tinto, its larger rival, scrapped a planned tie-up with Chinalco, a state-controlled Chinese company, in favour of a joint venture with BHP Billiton.

Anglo and Xstrata declined to comment last night. Glencore could not be reached for comment.

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