Lonmin deal rout is M&A warning as firms shun debt

By Douwe Miedema and Tessa Walsh - Analysis

LONDON (Reuters) - The credit crunch is threatening mergers even in resilient sectors such as mining, with fears about loan refinancing forcing Xstrata Plc (XTA.L) to drop its $10 billion bid for Lonmin Plc (LMI.L) on Wednesday.

Tough loan markets also make the financing harder of the few lucrative M&A deals bankers are still working on, such as BHP Billiton Ltd's (BHP.AX)(BLT.L) hostile bid of more than $100 billion for Rio Tinto (RIO.AX)(RIO.L).

The syndicated loan market, the primary source of funds for mergers and acquisitions, has all but dried up as it is becoming harder for banks to sell loans due to spiraling funding costs while the number of lenders shrinks.

"It will be difficult to accommodate new deals. Looking forward, we don't have any real expectations for this to pick up. Volumes will remain low for 2008 and for most of 2009," a credit analyst at a large bank said, asking not to be named.

"There is a lot of stuff coming due (in the loan market) and there is pressure on a market that is fairly at maximum already and very in-elastic," he said.

Xstrata had secured $15 billion of loan financing to buy Lonmin, but decided to cancel the deal as it was worried about refinancing the package in the next 12 months.

Big M&A loans typically have a large short-term component that needs to be refinanced in the bond market.

A hoard of large M&A loans mature in the next 12 months, which will force companies to hit bond markets just as spreads on debt have exploded and default fears spook markets.

But others said Xstrata might be using the seizing up of the loan market as a pretext to pull the deal.

"Xstrata's own view of the target price is coming down. I think they're using the financing markets as a tool to hammer the other side," a head of loan syndicate said, requesting anonymity because of dealings with clients.

Xstrata scooped up Lonmin shares as they fell on the news, effectively blocking any rival deal and setting the scene for another takeover attempt later.

DEAL DEARTH

Global M&A activity dropped 25 percent in the first nine months of the year, Thomson Reuters data showed this week, as companies are finding it hard to assess the value of acquisition targets and the market for leveraged buy-outs remains shut.

Ironically, spectacular bank bail-outs are now a major source of income for investment banks and the rescue of AIG (AIG.N) and Bank of America's (BAC.N) deal with Merrill Lynch MER.N have boosted a dwindling fee pool.

Other than that, bankers rely heavily on deals in resilient sectors such as energy and power, consumer staples, materials and healthcare, the data showed -- but as Xstrata showed a tight loan market might stem even those.