Xstrata shares slide after Vale talks collapse

ERIC ONSTAD

Reuters

March 26, 2008 at 9:09 AM EDT

LONDON — Shares in Anglo-Swiss miner Xstrata tumbled on Wednesday after the collapse of takeover talks with Brazil's Vale though both firms were expected to seek other takeovers.

Xstrata shares dropped more than 12 per cent at the opening, after the two firms said late on Tuesday they failed to agree on terms of what would have been one of the world's biggest takeovers, valued by some analysts at $90-billion (U.S).

Xstrata pared losses as bargain hunters snapped up shares and investors bet on the possibility of a fresh wave of merger pairings in a booming sector driven by heavy demand from China for metals.

Vale, the world's biggest iron ore producer, said it would look at other potential takeover targets while analysts said Xstrata was now open to resume its own merger activity, either as a target or suitor.

“Attention will refocus on Xstrata's next move with a tie-up with Anglo no doubt coming into focus again,” analyst Amos Fletcher at Cazenove said in a research note.

Xstrata chief executive Mick Davis has long said a combination with rival Anglo American could offer strong synergies, but sources close to the situation have said Anglo was not interested.

It was not clear which side would be the aggressor since they have similar market values – Xstrata at $67-billion and Anglo at $77.8-billion.

Anglo shares were one of the top gainers among the FTSE 100 , shooting up 3.6 per cent to 29.45 pounds as Xstrata lost 7.83 per cent to £34.25 by 11:30 a.m. GMT.

This compared to a 0.3 per cent rise in the UK mining index after Vale shares in New York closed up 3.97 per cent at $33.01.

Merrill Lynch advised “aggressive” buying of Xstrata shares below £33, which looked cheap after upgrades in the price outlook for two of Xstrata's main products, coal and copper.

Cazenove said Xstrata was trading at a price-earnings ratio of 6.0 based on estimated 2008 earnings and current metals prices, compared to 8.1 for the UK mining sector.

Vale chief executive Roger Agnelli said the talks collapsed over a dispute over future marketing rights.

Xstrata's main shareholder, commodities trader Glencore International, holds marketing rights to a large chunk of Xstrata's output in nickel, copper and other metals.

And it wanted to expand its rights in the merged company, something Mr. Agnelli has said would be difficult to swallow given Vale's relationship with its customers.

“While Vale and Xstrata continue to believe that a combination of the two companies could realize significant value for both sets of shareholders, we have not been able to reach an agreement,” Xstrata's Mr. Davis said, without giving a reason for the breakdown in talks.

Mr. Agnelli denied talks were scuppered by financing problems. Its takeover attempt has coincided with sharp volatility in global equity and credit markets.

In preparation for a potential Xstrata takeover, Vale had lined up about $50-billion in financing from banks including Santander, HSBC, BNP Paribas, Lehman Brothers, Credit Suisse, Citigroup, Calyon and Royal Bank of Scotland.

“We didn't need to buy and they didn't need to sell,” Mr. Agnelli said late on Tuesday at a news event in Sao Paulo.

BHP-RIO The softening in Vale's shares since a peak in October was the main reason the talks flopped, a source in London close to the deal said. That cut the value of the stock portion of the deal and the global credit crisis would have made it difficult to raise additional cash, he said.

Progress had been made over marketing rights but there was no point continuing talks if Vale was not able to pay enough, he said.

The failure of Vale's attempts to buy Xstrata threw open the question of whether the sector's biggest player BHP Billiton would be successful in its bid to swallow rival Rio Tinto.

Rio has spurned an all-share offer from BHP worth around $147-billion as undervaluing the firm and its expansion plans.