Bloomberg News

Xstrata Falls; FT Says $76 Billion Vale Bid Rejected

February 12, 2008

(Corrects share of Vale in hands of Brazilian government or agencies it controls in 17th-18th paragraphs.)

Xstrata Plc (XTA) dropped in London trading after the Financial Times reported it rejected a $76 billion takeover approach from Brazil's Cia. Vale do Rio Doce, the world's biggest iron-ore producer.

Xstrata and shareholder Glencore International AG dismissed the cash and stock offer valued at about 4,000 pence ($78.03) a share and are holding out for a bid closer to 4,500 pence, the newspaper reported today, citing unidentified people familiar with the offer. Vale may walk away from the talks, the FT said. Xstrata fell as much as 2 percent on the London Stock Exchange

Vale is seeking to overtake BHP Billiton Ltd. (BHP) as the world's largest mining company and maintain earnings growth after commodity prices rose threefold since 2002. Acquiring Zug, Switzerland-based Xstrata would give Vale copper mines in South America and coal and zinc mines in Australia.

``Vale could get in some controversy if they paid too much,'' Chuck Bradford, an analyst at Soleil Securities Corp. in New York, said yesterday from New York. ``It's something Vale wants to be very careful of.''

Xstrata fell as much as 120 pence to 3.685 pence, and was at 3,710 pence of 9:05 a.m. in London, valuing the company at 36.2 billion pounds ($70.7 billion).

Xstrata has gained 4.7 percent this year while Vale has dropped 6.4 percent over the same period on the Sao Paulo Stock Exchange. The differences in share-price movements have sparked disagreements in the talks, the Financial Times reported.

BHP Offer

Fernando Thompson, a Rio de Janeiro-based spokesman for Vale, and Pam Bell, a London-based spokeswoman for Xstrata, declined to comment. Lotti Grenacher, a spokeswoman for Baar, Switzerland-based Glencore, also declined to comment. Glencore owns 34 percent of Xstrata.

Rio Tinto Group, the world's third-largest mining company, rejected a $132 billion hostile offer from BHP last week as being too low. HSBC Holdings Plc said last month that Vale would have to pay more than 4,000 pence for Xstrata.

Vale's offer is valued at about 13 times earnings before interest and tax, the same as BHP's bid for Rio. Rio de Janeiro- based Vale paid $17.4 billion for Canadian nickel producer Inco Ltd. last year, or 12 times Ebit.

Vale confirmed it was in talks with Xstrata on Jan. 21. It also said at the time that no material result had come from its approach and tumbling stock markets worldwide made a deal more difficult to complete.

Drive for Profit

``What is driving it is clearly the high level of profitability and the need for continued growth,'' said Hans Kunnen, who helps manage $128 billion at Colonial First State Global Asset Management in Sydney. Target companies ``are optimistic about the outlook for the market and therefore put a higher value on themselves.''

BHP's Rio offer has added ``momentum'' to mining takeovers, Xstrata Chief Executive Officer Mick Davis said Dec. 6. Since BHP's initial bid in November, Aluminum Corp. of China and Alcoa Inc. have acquired stakes in Rio to block a takeover. On Feb. 6, BHP raised its bid, which was again rejected by Rio Tinto.

Xstrata's Davis has developed the company's copper and nickel mining capacity through acquisitions, including the $16.2 billion purchase of Canada's Falconbridge Ltd. in 2006.

Buying Xstrata will add copper, coal and zinc output to Vale's nickel and iron-ore production.

``There is a benefit by combining these two companies,'' Soleil's Bradford said. ``The more diversified companies like BHP and Rio are at a much higher value.''

Nearby Projects

Vale has operations adjacent to Xstrata in Canada's Sudbury basin and on the French-controlled Pacific island of New Caledonia. Vale and Xstrata have plans to expand nickel output further and said in early 2007 they were in talks to cooperate on transportation and other operations at Sudbury, 350 kilometers (218 miles) north of Toronto.

Vale is controlled by Valepar, a joint venture partnership that holds 52.29 percent of the mining company's common, or voting stock, according to government filings. The Brazilian government owns 60.52 percent of Valepar through Previ, the employee pension fund of state-controlled Banco do Brasil SA, Brazil's largest bank, and Brazil's state development bank, known as BNDES.

The rest of Valepar is owned by Mitsui & Co., the second- largest Japanese trading company, which has an 18.24 percent stake, and Bradespar SA, a Brazilian industrial holding company controlled by Banco Bradesco SA that owns 21.21 percent. Mitsui and Bradespar share veto power with Previ and BNDES over major Valepar decisions, according to securities filings.

To contact the reporters on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net; Brett Foley in London at bfoley8@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs in Sydney at ahobbs@bloomberg.net


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