Amid pressures from major shareholders to strike a deal, Swiss mining giant Xstrata plc has sent a proposal to its arch-rival Anglo American plc seeking their consideration of a possible $68 billion merger.
It is believed that Xstrata's chief executive Mick Davis has written to the board of Anglo American last week to initiate talks about a possible merge as equals to become one of the world's leading mining and natural resources company. Anglo's response on the matter is not clear.
Xstrata has developed from a small player into one of the world's largest diversified mining groups in recent years through a series of acquisitions with operations spread over 19 countries in five continents. It is the world's largest producer of thermal coal and ferrochrome and a leading producer of coking coal, nickel and zinc. The company's turnover for 2008 stood at $27.9 billion with a net profit of $3.9 million.
London-based Anglo American is a global leader in mining with diverse mining assets in its portfolio including precious platinum group metals, diamonds, copper, nickel, zinc, phosphates and bulk commodities iron ore, manganese and coal. The company operates in 45 countries across the globe in six continents, employing around 105,000 people. The company reported revenue of $26.3 billion and a net income of $5.2 billion in 2008.
Anglo also has a 45-per cent holding in diamond miner De Beers, which has been struggling with debts of $1.6 billion.
The merger would create one of the biggest natural resources companies in the world. Based on Friday's closing stock prices on London Stock Exchange, the combined value of the companies is around $68 billion.
Based in Zug, Switzerland and listed on the London and Swiss stock exchanges, Xstrata, which had been keen on a close partnership for a very long time with the London-headquarterd South African miner Anglo American, believes that a merger of the two world-class companies with complementary assets is highly compelling.
Since both companies have substantial operations in Australia and South Africa, the merger would create a premier portfolio of operations diversified across commodities and countries.
Analysts estimate the merger of Xstrata, the world's biggest exporter of thermal coal with the world's biggest producer of platinum, Anglo American, could result in cost savings of $700 million annually since both companies have coal mines in South Africa and Australia and would reduce their costs substantially in their copper mining operations.
''Xstrata has already quantified substantial operational synergies from the combination that are not available to either company operating alone. In addition, Xstrata believes the optimisation and reprioritisation of the combined company's organic growth pipelines would significantly enhance shareholder returns,'' the company said in a statement.
Xstrata's largest shareholder, Swiss metals trader Glencore International AG, which has a 35-per-cent stake, is said to be open to the deal, while other big shareholders, like US private equity firms Black Rock and Capital Group, are said to be pressing for one.
However, non-availability of credit had earlier forced Xstrata to bid for another rival, Lonmin Plc, the world's third-biggest primary producer of platinum group metals with a revenue of $2.2 billion (2008), as Xstrata had planned to fund the acquisition from borrowings.
After Lonmin rejected Xstrata's unsolicited $10-billion takeover offer in August 2008, Xstrata CEO Mick Davis had said that his company was open to a merger with another large miner such as Vale or Anglo American. (See: South Africa's Lonmin rejects Xstrata's $10 billion hostile bid)
But, the need to consolidate looks more compelling to Xstrata after Rio Tinto dumped Chinese resources giant Chinalco's $19.5-billion investment deal this month, opting for a joint venture with arch rival BHP Billiton to become the single biggest iron ore exporter in the world (See: Rio-BHP team up for mining venture) and could possibly even merge in the future to become the world's biggest miner.
Anglo American, the world's fourth largest mining group by market capitalisation said in a brief statement, "The board of Anglo American confirms that it has received a preliminary proposal from Xstrata, which may or may not lead to a transaction involving the group.''
''It should be noted that this situation is at a very preliminary stage and that there is no certainty that any transaction will be forthcoming," the statement added.
However, CEO Cynthia Carroll of Anglo had always maintained in the past that the company was better off remaining independent, although shareholders could be pushing her now to think in lines of a merger after the company's recent overpaid acquisitions and poor performance.
In February, Anglo reported that full-year net income fell to $5.2 billion from $7.3 billion a year earlier and the so-called underlying profit in 2008 fell to $4.36 a share, missing the $4.82 average expected by analysts. (See: Mining giant Anglo American reports 29 per cent profit drop, to cut 19,000 jobs)
To counter the current global economic downturn, the miner had announced $2 billion in cost cutting measures including axing 19,000 jobs by the end of 2009, followed by further cost-cutting opportunities. Anglo American employed about 100,000 people in 2007, with three-quarters in South Africa.
Anglo is also facing boardroom problems after the miner appointed Sir John Parker as the new chairman while many wanted local South African Fred Phaswana, chairman of an Anglo subsidiary, to head the company.
With Xstrata's market capitalisation being $33 billion and Anglo's $35 billion, the Swiss miner may find it tough to carry the deal forward as it is not offering a premium to Anglo shareholders, say analysts.
Moreover they say that Anglo's assets have a longer life and are considered more valuable than Xstrata's.
The role of Xstrata's largest shareholder, Glencore will be crucial for the merger to go through since it scuppered the proposed merger between Vale of Brazil and Xstrata last year (See: Vale in talks with Xstrata for a $100-billion merger) as it wanted the sole rights to sell metals of the combined group.
Also Xstrata cannot afford to make the same mistake it made with the failed hostile takeover bid for Lonmin Plc, as any hostile takeover of Anglo American could antagonise Anglo's largest shareholder, the South African government, which owns a 5-per cent stake through its Public Investment Corporation of South Africa.
The world's biggest mining company, Cia Vale do Rio Doce (Vale) of Brazil is also keen on acquiring Anglo American, which may trigger a battle as miners are trying to consolidate at a time when the mining industry is seeing balance sheets plunge after the five years of relentless boom.
Last week, the stock prices of Anglo shot up in the on the Johannasburg exchange amidst rumours that the Brazilian miner may possibly bid for Anglo. (See: Rumours of takeover bid lifts Anglo American, other mining stocks)