On Monday (June 22), Anglo American plc (AAUK, AAL.L) rejected Anglo-Swiss mining company Xstrata plc's (XTA.L, XSRAY.PK, XSRAF.PK) proposal for a $68 billion ‘merger of equals’ between the two companies, saying that the terms proposed by Xstrata were "totally unacceptable". The company added that the merger was ‘unattractive’ for Anglo American shareholders. Xstrata said it was surprised that Anglo American did not deem fit to engage with the company to discuss the merger proposal. But how long can Anglo American plc spurn Xstrata plc? Before we dig deep, why the deal in first place.
Why the deal in first place?
2008 was a year that saw the end of a lengthy period of highly supportive commodity prices as the trajectory of the global economy turned sharply downwards during the second half. The commodity cycle has swung sharply. Take for instance copper – according to the International Copper Study Group (ICSG) - world copper market saw a surplus of 48,000 tonnes between January and March of this year, compared with a 67,000 tonne deficit in the same period in 2008. Copper usage fell from 4.518 million tones to 4,335 million tones, a decrease of 4.1%. Had it not been for a very high apparent copper usage in China, the decline would have exceeded 10%.
Merger and acquisitions deals, to a large extent, are driven by cyclical pressures. 2008 proved to be a year of extremes. Commodity prices soared to record highs only to fall precipitously as the financial crisis intensified and economic conditions deteriorated. Mining industry deals in 2008 (number of deals:1668 value of deals:$153.4 billion) trumped 2006 (1026, $133.9 billion) and 2007 (1732, $158.9 billion) boom year levels in the early part of the year only to plunge back towards 2005 levels by the end of 2008. Mining shares went from rising star to falling asteroid status.
In 2008, BHP Billiton’s attempt to acquire Rio Tinto, a deal worth $150 billion, was scuttled by Competition Commission’s requirements and the deterioration in the financial and economic climate. However, a couple of weeks ago Rio Tinto and BHP Billiton agreed to combine their vast iron-ore operations in Western Australia to save the firms at least $10 billion. The deal was announced as Australian and British media reported that Rio's planned $19.5 billion tie-up with China's Chinalco had collapsed.
