Bloomberg News

Anglo American Seen Takeover Bait by Glencore-Xstrata: Real M&A

February 09, 2012

Feb. 3 (Bloomberg) -- Already one of the cheapest major mining companies, Anglo American Plc is becoming an even more likely takeover target with Xstrata Plc and Glencore International Plc’s potential merger threatening to leave it dwarfed by three of its closest rivals.

London-based Anglo may attract interest from Xstrata and Glencore should they combine to create an $82 billion company, people familiar with the matter said. Anglo, which is less than half the size of either BHP Billiton Ltd. or Rio Tinto Group, sold for 6.4 times earnings yesterday, according to data compiled by Bloomberg. That’s cheaper than any of its biggest competitors, apart from Rio de Janeiro-based Vale SA.

Glencore and Xstrata together could have the financial wherewithal to take over Anglo, worth $59 billion yesterday, after Xstrata failed in 2009 to convince Anglo to combine in a “merger of equals.” By acquiring Anglo’s assets in diamonds, platinum and steelmaking coal, the Glencore-Xstrata entity would vault past Rio and rival BHP, the world’s largest mining company by revenue, data compiled by Bloomberg show. Anglo may also be attractive to BHP, according to WallachBeth Capital LLC and Lutetia Capital.

“Anglo hasn’t closed the ranks sufficiently to prevent” a takeover, Timothy Parker, manager of the $4.5 billion T. Rowe Price New Era Fund in Baltimore, said in a telephone interview. The fund owns shares of Anglo, Xstrata, BHP and Rio. “You can see the obvious allure” for Glencore and Xstrata, he said.

“Buying Anglo would let them enter the ranks of the true majors. Anglo is the right size for a combined company. It’s big, but it’s doable,” Parker said.

Diamonds, Coal

James Wyatt-Tilby, a spokesman for Anglo, declined to comment on whether it has been approached about an acquisition.

Simon Buerk, a spokesman at Baar, Switzerland-based Glencore, Alison Flynn, a spokeswoman for Xstrata in Zug, Switzerland, and Kelly Quirke, a spokeswoman for Melbourne-based BHP, all declined to comment on whether the companies are interested in acquiring Anglo.

Anglo, which mines for everything from diamonds to platinum and coal and has operations on almost every continent, was founded in Johannesburg by Ernest Oppenheimer in 1917. It grew to become South Africa’s biggest company during apartheid as sanctions limited its ability to expand abroad. The company, which moved its headquarters to London in 1999, controls Anglo American Platinum Ltd., the biggest producer of the metal used in catalytic converters that make exhaust fumes less toxic.

Anglo also bid $5.1 billion in November to boost its stake in De Beers, the world’s largest diamond miner, to 85 percent.

Back Together

Anglo climbed 3.6 percent to a six-month high of 2,830.5 pence in London yesterday on speculation that a combined Glencore and Xstrata may eventually make a bid for the company. The shares advanced 2.4 percent at 2:56 p.m. today in London.

Xstrata in October 2009 dropped its proposed 29.2 billion- pound ($47.4 billion) offer to merge with Anglo, five days before a deadline for it to make a formal bid or walk away. Anglo, which had turned down the merger plan in June of that year, rejected the strategic rationale and “underwhelming valuation” of the proposal.

“Anglo American has always been within the sights of the Glencore group,” Sachin Kumar, an analyst with Paris-based AlphaValue, said in an e-mail. Glencore is “better placed to merge Xstrata with itself. So this may be why markets are more confident of a takeover of Anglo American this time,” he said.

Glencore, which holds 34 percent of Xstrata, made an approach regarding an all-share “merger of equals,” Xstrata said in a statement yesterday.

Financial Power

Glencore, the world’s largest publicly traded commodities supplier, said there’s no certainty of an offer. A combination would bring together two groups that separated a decade ago when Xstrata bought Glencore’s Australian and South African coal mines for $2.5 billion and went public in London.

A merger between Glencore and Xstrata would also create an $82 billion rival to BHP, valued at $203 billion yesterday, and Rio, which had a market capitalization of $123 billion, data compiled by Bloomberg show.

Together, Glencore and Xstrata would have the flexibility and financial power to make large acquisitions, according to people familiar with the discussions.

They may consider an offer for Anglo, though any such move would be unlikely to happen before they complete their merger, said the people, who declined to be identified because the matter is private. That process may take as long as six to eight months, one person said, adding that any offer for Anglo could be preempted by rival bids from its competitors.

Not Imminent

“Anglo is undervalued and has good prospects,” said David Winters, the Mountain Lakes, New Jersey-based manager who oversees the $1.5 billion Wintergreen Fund, which has beaten 99 percent of its competitors in the past five years and owns shares of Anglo. Still, “we have to see what happens with Glencore and Xstrata. Nothing’s confirmed yet so I think we have to wait on that,” he said.

Anglo yesterday traded at 6.4 times its earnings in the past 12 months, data compiled by Bloomberg show. That was less than half its average of 14 times in the past decade and about a third lower than the average for base metal mining companies and raw materials suppliers with more than $20 billion in value.

“It must be very attractive to take out companies as cheap as Anglo,” Gerhard Lampen, head of Sanlam iTrade, a unit of South Africa’s biggest insurer, said in a telephone interview from Johannesburg. “They are targets for sure.”

Potential Buyers

BHP could also be interested in Anglo, according to Lutetia Capital and WallachBeth Capital.

Anglo’s diamond holdings would be an attraction for BHP, according to Jean-Francois Comte, co-founder of Lutetia, which manages a $100 million event-driven fund in Paris.

BHP, which needs a large deal to “move the needle,” may be interested in Anglo’s coal assets, according to Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth. Anglo may also pursue an acquisition of its own, he said.

“The likely Xstrata-Glencore deal means it’s more pressing now for Anglo to look for a corporate tie-up of its own,” said Gavin Wendt, founder and senior resource analyst at Mine Life Pty in Sydney. Anglo “will be feeling the pressure because it risks being left behind,” he said.

BHP, Rio

T. Rowe’s Parker said that combining Anglo with Glencore and Xstrata makes the most sense and would help the new entity compete with two of the world’s largest mining companies by revenue, BHP and Rio.

BHP had $72 billion in sales in the past 12 months, while Rio had $60 billion, data compiled by Bloomberg show. Together, sales at Anglo and Xstrata reached $64 billion.

Buying Anglo would also give Glencore, which trades commodities including coal, oil and metals, a greater supply of materials to put through its network, Parker said.

“In the past, there has been a lot of speculation about such an end game,” Jeff Largey, an analyst at Macquarie Group Ltd. in London, said in a telephone interview. “The market thinks that this could be a natural combination. You would see Xstrata and Glencore pair up and ultimately merge with Anglo.”

--With assistance from Firat Kayakiran, Jesse Riseborough, Patricia Kuo and Matthew Campbell in London, Jacqueline Simmons in Paris, Charles Mead and Simon Casey in New York, Elisabeth Behrmann and Andrew Hobbs in Sydney, Brett Foley in Melbourne and Jason Scott in Canberra, Australia. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Carli Lourens in Johannesburg at clourens@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; John Viljoen at jviljoen@bloomberg.net.


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