LONDON Anglo-Swiss miner Xstrata Plc XTA.L dropped immediate plans for a $10 billion bid for No. 3 platinum producer Lonmin Plc (LMI.L) on Wednesday but set the scene for a later deal by scooping up Lonmin shares as they fell.
Xstrata, the world's fifth biggest mining group by market value, said financial turmoil and difficult debt terms were behind the decision, but it increased its stake in Lonmin to 24.9 percent, making a rival bid very unlikely.
"Xstrata are not walking away, but have effectively locked out a competing bid at an attractive average-in price for their stake," analyst Michael Rawlinson of Liberum Capital said.
Xstrata, which already had a 10.7 percent Lonmin stake, bought 22.2 million shares at an average of 19.79 pounds each, well under its initial proposed offer of 33 pounds per share unveiled on August 6.
Xstrata built up its stake to the maximum allowed under UK takeover rules, which stipulate it cannot make a formal bid for Lonmin for six months unless it is agreed by the company.
After 12 months Xstrata is free to make a bid lower than the 33-pound-per-share proposed bid.
Lonmin's shares, which had already shed a third since Xstrata made its approach tumbled as much as 30 percent and were trading 16.6 percent weaker at 18.96 pounds by 7:37 a.m. EDT.
Xstrata shares, which had lost 46 percent since it made the approach, surged 7.6 percent to 18.46 pounds, compared to a 3.9 percent increase in the UK mining index .FTNMX1770.
Xstrata said it passed up on making a formal bid due to the current chaos in financial markets.
"The current lack of clarity and certainty regarding the future availability of credit introduces significant risks into the financing package available to Xstrata," Chief Executive Mick Davis said in a statement.
Xstrata said loan terms required it to refinance a substantial portion of the debt within 12 months.
"Finalizing the bank debt necessary to implement the offer on those terms would not be in the best interest of Xstrata. As a result, Xstrata has no current intention to make an offer for Lonmin."
Banking sources told Reuters last month that Xstrata had approached 22 banks to make commitments for a $15 billion loan to both fund the Lonmin takeover and refinance existing debt.
Lonmin, which had spurned the offer as too low, said it would continue to press on with a strategic review following Monday's replacement of Chief Executive Brad Mills, who had been criticized for the firm's underperformance.
"Xstrata's attempt to acquire Lonmin highlights the fundamental long-term value of Lonmin's business and the scarcity of large scale opportunities to enter the PGM market," Chairman John Craven said.
Xstrata has argued it had the expertise to turn around the South African mines owned by Lonmin, which has repeatedly cut its production targets due to operational problems, smelter difficulties and power shortages.
Analysts had largely supported the bid since Xstrata has a track record of improving performance of companies it has bought, such as Canada's Falconbridge and Australia's MIM.
Lonmin expressed confidence in the long-term health of the platinum sector, the price of which has tumbled by half since hitting a peak in March.
The precious metal has been hit hard due to liquidations by funds and worries that weaker economic growth will curb demand from the metal's biggest consumer, the auto industry, for catalysts to clean exhaust fumes.
Analyst Jason Fairclough at Merrill Lynch said Lonmin earnings would dive 80 percent based on current spot prices. The firm is due to release results for its financial year to end September on November 18.
UBS said in a research note that the firm's net present value at current spot prices for the 2009/10 fiscal year was 15 pounds a share.
(Reporting by Eric Onstad; editing by John Stonestreet, Elaine Hardcastle)