Swiss-based Xstrata has proposed a ‘merger of equals’ with UK-based Anglo American, arguing that a tie-up between the two – which would create a £41bn company – is ‘highly compelling’. However, Anglo begs to differ, judging by its distinctly lukewarm reaction: it put out a holding statement saying that talks were ‘at a very preliminary stage’, while apparently beavering away behind the scenes to convince shareholders that it’s better off going it alone. But Anglo's problem will be that after the year it's had, its big shareholders might be rather keen on the idea.
Xstrata’s approach comes at a difficult time for Anglo and its CEO Cynthia Carroll. Recent reports have suggested that some of Anglo’s biggest shareholders are unhappy with Carroll’s recent performance: specifically in over-paying for recent acquisitions, axing the dividend this year, and failing to get a new chairman confirmed by the South African government. In fact, these anonymous sources even suggested that Anglo would be better off merging with Xstrata so its boss Mick Davis could run the show. If we didn’t know better, we might cynically wonder whether the emergence of this story just before a merger bid was an effort to undermine Carroll’s position.
Anglo’s view appears to be that there’s nothing to be gained from a merger – the two firms operate in largely separate spheres, it claims, so there’ll be little opportunity for the dreaded ‘synergies’. Besides, it’s already planning to cut £1.2bn of costs in the next couple of years, by losing 19,000 staff and centralising procurement (among other things), so why should some other group reap the rewards of that?
Xstrata has a rather different take, however. It suggests that the two firms have ‘complementary assets’, while a tie-up ‘would create a premier portfolio of operations diversified across commodities and geographies, with enhanced scale and financial flexibility to fund future growth.’ In other words, a combined group would be bigger, stronger, and more able to compete with the sector’s bigger boys. It also thinks there will actually be cost savings in their platinum, diamond and copper mining operations, not to mention at head office.
Unfortunately for Anglo and Carroll, the City seems to agree with Xstrata. Analysts estimate savings of anywhere between $700m and $1.7bn, while news of the potential merger saw Anglo’s share price shoot up more than 12% at one stage this morning. So there’s clearly a lot of support for this deal. Carroll is going to have her work cut out here...
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