/ 22 June 2009

TAKE2: Xstrata plus Anglo equals Xanglo?

Xstrata's letter to Anglo American proposes a merger of equals, we are told. The diversified miner sees savings of $750-million a year from the entity

Xstrata’s letter to Anglo American proposes a merger of equals, we are told. The Swiss-headquartered diversified miner sees savings of $750-million a year to be wrenched from the combined entity.

On the face of it, it does look equal-ish in that before the proposition was made public Xstrata had a market value of $33-billion. Anglo’s was not dissimilar at $35-billion. Anglo was up about 10% at one stage in reaction to the news and Xstrata fell by 4%, making the two less equal in value, but this is by the by.

Analyse any merger or takeover, the pundits will tell you, and no matter how equal-ish the parties look, one of the two is less equal and ends up as the acquiring party.

This may come down to as narrow a issue as which of the two parties supplies the chief executive. In this case — since the initiative comes from Xstrata — one has to think that Mick Davis has not got Cynthia Carroll pencilled in for the top job.

You also have to think that shareholders in the combined entity, should it ever get that far, would want to see a disproportionate number of Xstrata executives running the new, combined, leaner show.

But management egos are probably the least of Xstrata’s worries in convincing key stakeholders that this is a good deal. They will have to convince both their and Anglo’s shareholders that the relative valuations are fair and that the combined entity will indeed bring savings.

But this could be easy stuff too, compared with convincing governments and regulatory authorities that the Xanglo is a good idea. Our competition authorities will want clarity on the effect that behemoth plus behemoth would have.

The party who would have the biggest say is the government. When you are taking cost cutting you are talking fewer jobs.

The SA government is too small a direct shareholder — through the Public Investment Corporation — to have a direct say on Anglo’s future, but as the custodian of mining and associated rights, Xanglo would want to be sure that it had the blessing of this authority.

To get this blessing it will have to get the buy-in of the unions. The unions will only be happy if cost-cutting does not mean fewer jobs. Which all means that while Xanglo may be a gleam in Davis’s eye, it is still some way off, if indeed it ever materialises.