Johannesburg — IT DIDN'T take long for Anglo American to rebuff Xstrata's proposed "merger of equals". The 91-year-old Anglo made it quite clear it didn't see seven-year-old Xstrata as an equal at all: its market value might be roughly similar to Anglo's but its mining assets were of much poorer quality.
But just because Anglo has said a swift, firm no doesn't necessarily mean a merger is off the table. It was never likely that Xstrata would get away with an "equals" deal in which no premium was offered to Anglo shareholders. It could well come back with something sweeter. But it doesn't have the resources to offer cash so it's likely to be an all-paper deal, in which Xstrata would offer its shares in return for Anglo's.
Whether it will or not, and at what premium, we will see in coming weeks. Meanwhile, it's worth asking whether an Xstrata- Anglo merger would be good for SA and its mining industry, not just whether such a deal would be good for shareholders. Trade unions and some in government are asking these questions. And though shareholders must be the ones to decide on any deal, they are constrained by the need for regulatory approvals from the competition authorities, in SA and in all the other jurisdictions in which Anglo and Xstrata operate. They will need the blessing too of the Reserve Bank, given that about a quarter of Anglo's shareholders are South African. And there are mining licences that depend on government approvals. So the SA authorities do have some say.
The knee-jerk response tends to be to say no. That's partly sentiment: Anglo's centre of gravity and its head office shifted to London a decade ago, but it still has 40% of its assets in SA and to many here its SA roots still loom large. Added to that are concerns about potential job losses in SA as well as about competition issues and about the JSE if Anglo delists.
The delisting fear is almost certainly groundless. Chances are that Anglo shareholders would receive shares in the merged entity and those new shares would still have to be listed on the JSE, because of exchange control regulations. So that one's not to worry about. But jobs could be an issue. The threat to blue collar mining jobs might not be massive, since the overlaps are mainly in coal and the biggest cost savings would likely come in rationalising at head office level. But jobs are precious at a time like this. Competition, especially in coal, could be an issue too, even if Xstrata argued that coal is really a global not a local market.
But ultimately SA and its mining industry will be best served if the companies in the sector make good profits and have good growth prospects, so the real question is whether the merged entity would do better than Anglo on its own. And here the jury is out. There are synergy benefits to be had and the combined group would be a formidable global player. But in a real sense this is simply a bet on leadership. Many shareholders have been unhappy with Anglo CE Cynthia Carroll; they want Xstrata's high-flying Mick Davis instead. How much is he worth? That's something Anglo shareholders will have to decide if a fresh offer is made.
