Hopes for Xstrata-Anglo union to be thwarted

LONDON (Reuters) - Xstrata (XTA.L) is still keen for a marriage with mining rival Anglo American (AAL.L), but should be braced for another cold shoulder in spite of vocal match-making by some investors.

Xstrata has regarded Anglo as an attractive partner for several years and talk about such a combination has resurfaced in the wake of a recent iron ore deal between bigger rivals BHP Billiton (BLT.L) and Rio Tinto (RIO.L).

The options are limited for Xstrata since a hostile takeover, while not impossible, would run the risk of opposition from the South African government, a major Anglo shareholder.

Xstrata declined to comment on recent media speculation that some unhappy Anglo shareholders were trying to engineer a link-up, but banking sources said Xstrata's previous interest in Anglo has not dimmed.

Some of the restive shareholders -- which have seen Anglo's shares underperform Xstrata's by 44 percent and the UK mining index .FTNMX1770 by 23 percent so far this year -- fault Chief Executive Cynthia Carroll.

"I think institutions have been very frustrated with Anglo and think Xstrata's management is more capable and able to really take the portfolio forward," said an investment banker.

A hedge fund manager with shares in both firms supports a merger, but has a bone to pick with both Carroll and Xstrata CEO Mick Davis.

"As shareholders we'd like to see Anglo doing restructuring faster. With Xstrata, we're a little bit disappointed to say the least. Mick Davis has been a great M&A investor, but his foray into Lonmin at the top of the cycle was very disappointing."

Xstrata dropped a $10 billion cash bid for world No. 3 platinum producer Lonmin (LMI.L) last October, but bought a 24.9 percent stake at nearly 20 pounds a share compared to a range of 5.12-16.13 pounds since December.

The hedge fund manager said an Xstrata/Anglo merger could better compete with BHP (BHP.AX) and Rio (RIO.AX), which said on June 5 they had agreed to put their Australian iron ore operations into a joint venture.

"The combination makes total sense, especially in the light of Rio and BHP getting closer to each other and maybe eventually merging, so we would be very supportive for sure."

Nomura analyst Paul Cliff estimated in a recent note that a merger could result in cost synergies of $700 million per year, or 2 percent of combined operating costs.

DASHED HOPES

Hopes by Xstrata and some investors for a link-up, however, would be dashed again by Anglo, which sees little rationale for a merger, said an industry source familiar with Anglo's thinking.

Anglo declined to comment on the recent speculation.

"It's just hard to see what the logic is for putting the two companies together. Anglo assets are of significantly higher quality and they've got longer lives by a large margin," said the source, who declined to be named.

"Apart from two joint ventures, there are no contiguous assets. They also operate on completely different management models, centralized for Anglo and decentralized for Xstrata, which would cost a lot to strip out of one or other company."

A top-10 investor in Anglo's London shares supported management and did not see support for a merger.

"As far as we are concerned the company has a chief executive who is working away. We haven't made any criticism," said the investor.

"Some of this comment that seems to be appearing from nowhere seems pretty hysterical. No doubt there is somebody somewhere with a very strong ulterior motive."

Anglo supporters point out that Xstrata shares have shot up this year because they fell much more during the downturn. From last year's peaks, Anglo has outperformed Xstrata by 60 percent.

Even those who support a merger agree that a hostile approach was very unlikely.

"This ultimately would have to be a friendly deal just because of the complications of doing a deal with such a large South African group -- the government relations and exchange controls -- it's not straightforward," said the investment banker.

Government officials may be wary that a merged firm may seek to cut costs by shedding jobs and dilute the identity of one of South Africa's biggest listed companies.

Even if Anglo felt pressured to have some preliminary discussions with Xstrata, it would be wary of doing so while still searching for a new chairman, investors agreed.

(Additional reporting by Raji Menon; editing by Simon Jessop)