DealZone

With Anglo having spurned a premium-less bid from Xstrata, the chances of the proposed “mergers of equals” getting done is dimming. The spurned suitor said it was disappointed, but that’s about all it said, so while the possibility of a hostile approach cannot be ruled out, analysts say such a costly alternative is highly unlikely.

Analysts had been reasonably upbeat on Xstrata’s proposal, talking up the merits of a tie-up even as the steel industry shuddered and the government of South Africa, where Anglo has the bulk of its operations, squawked.

But just as investors were dumping their Anglo shares, talk emerged of the possibility of interest from two emerging market heavyweights: China’s Chinalco and Brazil’s Vale. Anglo’s stock quickly steadied.

Having been thwarted in its bid to acquire much larger miner Rio Tinto, China has shown tremendous appetite for a deal that would secure it the resources it desperately needs to keep its industry humming. The same goes for Brazil.

If it turns out Xstrata has opened the door to state-backed muscle for a deal — targeting itself as well as Anglo — Xstrata CEO Mick Davis may find his own firm fending off takeovertures.

Just when you thought M&A was dead, along comes the $68bn “merger of equals” proposal between Anglo-Swiss mining giant Xstrata and rival Anglo American.

Xstrata confirmed over the weekend that its chief executive Mick Davis recently wrote to Anglo American’s outgoing chairman Sir Mark Moody-Stuart about doing a deal. On the back of that, Anglo’s shares surged as much as 12.4 percent before falling back during Monday’s trading.  Spurred on by uncertainty in the global economy, a need for substantial cost-savings, the recent merger of Rio Tinto’s iron ore business with that of BHP Billiton’s – and a belief that Xstrata must double its size to catch its closest competitor, Rio Tinto – and you have the rationale behind Davis’s thinking.

“The combination would create a premier portfolio of operations diversified across multiple commodities and geographies, with enhanced scale and financial flexibility to fund future growth,” Xstrata said in a statement. According to Citi analysts, the deal “makes financial and strategic sense, and could create synergies of up to $750m.  The combined entity would be a global leader in base metals, platinum, ferrochrome and coal”.

If the global recession wasn’t enough, with its idled auto factories and demand dwindling from the construction to the ship-building industries, the world’s steelmakers are facing the kind of consolidation that could well be a transformative event for the business.

Coal giant Xstrata aims to buy Anglo American for $68 billion in a tie-up between two of the biggest iron ore suppliers, creating the second-largest producer of steel-making coals. The move follows joint-venture plans from ore suppliers BHP Billiton and Rio Tinto and is seen as a big threat to steelmakers’ ability to exert any control over falling prices. Expect plenty of opposition from governments about too much pricing power residing in too few hands.

But the deal has other obstacles as well. Xstrata is offering effectively no premium to Anglo shareholders, which is producing loud squawks of outrage from investors. Perhaps by the time this one gets ironed out, the global recovery will be in full swing.