-- Alexander Smith is a Reuters columnist. The opinions expressed are his own --
By Alexander Smith
LONDON, July 2 (Reuters) - Anglo American is sitting back after rejecting Xstrata's nil-premium merger proposal.
The bid isn't sufficiently compelling to force Anglo to the table or into the arms of a white knight. So the group is logically seeking to string things out while assembling its case to remain independent.
The market has bolstered Anglo's case a little, widening the miner's premium over its rival and indicating that Xstrata will have to come back and offer more if it wants to take things further. Anglo's challenge is to maximise the size of that differential so it can either put itself beyond Xstrata's reach or force the bidder to pay a fat premium to achieve control.
Xstrata boss, Mick Davis, has essentially acknowledged that the nil-premium proposal is effectively dead in the water, noting wryly that it is rare for nil-premium mergers to work "if the other party does not want to play with you".
Anglo is in no mood to play, making it abundantly clear what it thinks of Xstrata's proposal -- both in terms of value and strategy. The group has let it be known that it looked at the possibility of doing deal with Xstrata 18 months ago and rejected the idea, not least because it did not want to change its business mix. And only three weeks before Xstrata's approach, Anglo's board had run a slide rule over a deal -- the decision was the same.
So what should Anglo do to bolster its defence?
First, there's the question of management. Anglo is right to stick with chief executive Cynthia Carroll as to jettison her would weaken its management team and simply play into Xstrata's hands. But it should use the choice of a new chairman to replace Mark Moody-Stuart as an opportunity to put in an a tough minded character who can hold Carroll's feet to the fire. She has a point to prove after a public roasting over her supposed failings as chief executive -- now is her chance.
Carroll's challenge is to show there is more to Anglo than investors have been giving it credit for -- some estimates put the discount of Anglo's market value to its sum-of-the-parts value at 13 percent. There is no point in trying to flog off assets such as building materials group Tarmac at knock-down prices. And a u-turn on Anglo's decision to pass on its dividend would be counter-productive.
Anglo needs to show it is making more significant progress with its own $2 billion cost-saving programme, as well as highlighting the value of recent investments such as its Brazilian Minas-Rio iron ore project by selling a stake in order to share the development costs.
Anglo rejected Xstrata partly because a merger would dilute its exposure to platinum, iron ore and diamonds. Carroll now needs to really get Anglo Platinum (AMSJ.J) to up its game. The South African platinum business is already undergoing a restructuring and shedding around 10,000 jobs.
Anglo has limited defence options if Xstrata does offer a chunky premium. The best way to prevent Davis and his team from grabbing the spoils is to show the value in remaining independent. It's time for Anglo to reveal its hidden gems.
-- At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, Reuters' customers can click on [SMITH/] --
Editing by David Evans