Investor pressure, premium key to Xstrata/Anglo deal

By Eric Onstad - Analysis

LONDON (Reuters) - Xstrata could wait for shareholder pressure to build on rival Anglo American before considering a premium bid for the group, while Anglo, enjoying share outperformance, is in no hurry to break the impasse.

Two weeks after Anglo sharply rebuffed Xstrata's proposal for a "merger of equals," a resolution looks a distant prospect.

Since Xstrata announced it had sent Anglo's board a letter about a possible tie-up, Anglo's shares have performed 13 percent better than its rival's and 9 percent better than the UK mining index.

Anglo has shown no signs of utilizing takeover rules to force Xstrata to make a bid or walk away, and on Tuesday it declined comment on whether it would seek a "put up or shut up" ruling.

Xstrata needs to decide whether to make a formal offer, but in the meantime it may be banking on pressure from the Anglo shareholders or waiting for the appointment of a new chairman at Anglo to bring management to the negotiating table.

Xstrata declined to comment on whether it would make a formal offer, only saying: "We continue to see it as a compelling transaction and would like to engage with Anglo's board."

Analyst Tom Gidley-Kitchin at Charles Stanley said he believed Xstrata would eventually lay down a formal offer.

"They're not going to walk away. This deal has been talked about for a long, long time and it is Xstrata's one chance to reach the top-tier level of global miners," he said.

Xstrata has a market value of $31 billion, but teaming up with Anglo would create a group worth $68 billion, closer to rival Rio Tinto's $74 billion and sector No. 1 BHP Billiton at $137 billion.

"It's really a question of price and relative shares and how Xstrata can structure a deal that gives Anglo shareholders a suitable premium that isn't too massively dilutive to Xstrata," said Gidley-Kitchin.

One source familiar with the situation said that the impasse could last for a long time.

"The ball's in Anglo's court at the moment for them to demonstrate to their shareholders they can create more value than a merger with Xstrata," he said.

Anglo has drawn up a short list of candidates for chairman and is in the process of choosing a final candidate, said another source close to the situation who declined to be named.

NIL PREMIUM, NO PROGRESS

Xstrata Chief Executive Mick Davis strongly defended the concept of "nil-premium" mergers in a speech last week, but said those were rare.