The board of Anglo American (AAUK) met today to discuss the offer made by Anglo-Swiss mining company Xstrata (XSRAY), and reportedly the board of Anglo American unnanimously decided against the merger. The board’s decision was not all that unexpected as management had characterized the merger talks as preliminary. The deal was billed by Xstrata as a merger of equals based on the similar capitalization sizes of the mining companies, and their complementary products. The proposed company would be half owned by each company and no cash change hands. However, Anglo American doesn’t seem to be too interested in linking up with Xstrata in the $68 billion all stock deal.
Analysts have estimated that the joining of the two large miners would save somewhere in the neighborhood of $750 million to $1.7 billion per year, which is certainly appealing to both sides. However, Anglo American is skeptical that the cost savings would be as substantial as reported, and believes it is bringing more attractive assets to the table than is Xstrata; as Anglo American is already the worlds biggest miner of platinum. The combined company would be a leader in mining of such base metals copper, zinc, nickel, and of course platinum. 
Over the past few months, Xstrata has been outspoken about its desire to merge with a strong mining company. There are also concerns over the how the corporate cultures of the two companies would mesh together, as Xstrata is known to be extremely lean and decentralized, which is opposed to Anglo American which has a far different reputation. As an example, Xstrata has been able to achieve slightly higher revenue than Anglo American in the last year with just 40% of the workforce.
In addition, Anglo American is rightly fearful that the merger would entail taking on more debt in order to complete the deal, which is not attractive as the debt load is already substantial. Xstrata is trying to take advantage of a rift within the Anglo American shareholders as support for CEO Cynthia Carroll is waning as the stock has languished and the dividend suspended. Proponents of the deal see Anglo American as providing the edge in assets and Xstrata providing the edge in leadership. With Carroll’s ability to stay in control of the combined company in jeopardy, there is ample reason for her to wait for a better deal.
At Ockham, we do not cover Xstrata, but we do cover Anglo American and we currently have their stock rated as Undervalued. Given the current fundamentals such as earnings and revenue, we think that Anglo American should trade somewhere between $16 and $24. Obviously, AAUK’s earnings will be heavily influenced by commodity price swings, but as of current estimates the forward looking P/E is only 5.8x. This being the case, we can see why the board is not to keen on taking 50% ownership in a company when their stock is trading in mid-$13’s. We think it wise to wait and see just how bad Xstrata wants AAUK, but also do not be surprised if the price tag gets too high they may start knocking on the door of smaller platinum miner Lonmin (LNMIY).
“Xstrata has made a proposal to its rival, Anglo American, saying, would you like to do a merger of equals with you. And by the way, we’d like to run the combination, would that be okay with you? Yeah, all right. We’d have a $65 billion overall market value…” Squawk on the Street 6/22/2009
