DBRS Comments on Possible Merger between Xstrata and Anglo American

DBRS notes that on June 21, 2009, Xstrata plc (Xstrata) announced that it had sent a written proposal to the board of Anglo American plc (Anglo) regarding a merger of equals between the two companies. Today, Anglo’s board announced that it has rejected the proposal. Anglo has concluded that the terms of the merger proposed by Xstrata are unacceptable and that the proposed combination would be unattractive for Anglo shareholders. Nevertheless, DBRS notes that this situation is at a very preliminary stage and that there is still a possibility that a merger of the two companies could be forthcoming. However, DBRS notes that it is too early to comment on the impact of a potential merger on the credit ratings of the two companies.

If talks between the two companies resume and the merger is successful, DBRS believes that the business profile would strengthen as the combined companies would produce a portfolio of top quality assets with major operations in platinum, metallurgical and thermal coal, iron ore and base metals. The combination of the two companies would also enhance geographic diversity and optimize growth pipelines. It is expected that the merger would also lead to significant financial synergies. Notwithstanding these positives, the combined entity would still face challenges such as commodity price volatility, sensitivity to operating currencies and integration risk. The ratings would also reflect the level of debt and future expectations regarding such.

There are also headwinds to execute a potential merger between the two companies. Impediments to the completion of a transaction could include difficulties in getting approvals from the various stakeholders including governments (primarily the South African government, a major Anglo shareholder), shareholders, anti-trust regulators, etc. Although Anglo is London-listed, its operations are mostly in South Africa; as such the South African government could oppose any merger that would result in significant job losses. With Anglo’s position as the largest producer of platinum, South African anti-trust authorities could block the merger unless Xstrata sold its 25% interest in Lonmin Plc, a platinum producer.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Mining, which can be found on our website under Methodologies.

This is a Corporate rating.