DealZone

M&A wrap: Buffett trades off his reputation

Warren Buffett showed again that his name and money is enough to give a struggling company instant credibility in the market. But the legendary investor also demonstrated his canny command of that reputation means that deals such as the $5 billion investment in Bank of America can immediately generate profits.

Anglo-Irish bank has chosen preferred bidders for its $9.5 billion U.S. commercial real estate loan portfolio and aims to have completed that sale, the largest in the United States in recent years, before the end of the year.

Glencore, the world’s largest commodities trader, stood on the verge of its largest takeover bid since its May stock market listing, after South Africa’s Optimum Coal confirmed it had received approaches.

The New York Times’ Dealbook is reporting that Rio Tinto and the Mitsubishi Corporation have raised their offer for Coal & Allied to approximately $131 a share , valuing the company at about $11.6 billion.

The blogging service Tumblr is close to raising $75-$100 million in venture capital, implying a market value of $800 million, the Wall Street Journal reported, citing people familiar with the matter.

Deals wrap: GE to slow M&A warpath

General Electric Co Chairman & CEO Jeff Immelt talks to the media before speaking at the Detroit Economic Club in Birmingham, Michigan June 26, 2009. REUTERS/Rebecca CookGeneral Electric continued on its M&A warpath with a $3.2 billion agreement to acquire France’s Coverteam, a maker of automation systems used in the oil and gas sector, marking the latest in a series of deals in the energy industry. But, after some $11 billion in acquisitions in the energy sector over the past six months, GE plans to slow its pace of dealmaking, a top executive said.

Rio Tinto said it would go ahead with its A$3.9 billion ($4 billion) takeover offer for Riversdale Mining even if it ended up with a minority stake in the Mozambique-focused coal miner.

Canada’s federal election could add a fresh element of uncertainty to the London Stock Exchange‘s proposed C$3 billion ($3.1 billion) takeover of TMX Group, a deal which was already seen as far from a sure thing, writes Cameron French.

Deals wrap: Power merger

A sign is pictured on Wall St. near the New York Stock Exchange in New York November 25, 2008. REUTERS/Lucas Jackson Northeast Utilities will buy peer NSTAR in a $4.17 billion all-stock deal to create one of the largest U.S. utilities. *View article

BHP Billiton and Rio Tinto scrapped a plan for a $116 billion iron ore joint venture. The announcement was widely expected and could result in both miners stepping up competing expansions. *View article *View reaction

“The strong interest from traditional funds and high-profile Chinese investors in the sale of the unit of American International Group comes amid a flood of Asian IPOs that have cemented the region’s dominance in initial public offerings this year,” reports Denny Thomas and Kennix Chim. *View AIA article *View article on the IPO fee bonanza

Groupon’s valuation has been growing fast but don’t expect the company to have the same success as Ebay, writes TechCrunch’s Michael Arrington. *View article

Deals wrap: Viewing Potash through the media

Rocanville Potash Corp underground production supervisor Dave Esslinger displays a sample of potash 3280 feet below surface at the potash mine in Saskatchewan September 30, 2010. REUTERS/David StobbeReuters blogger Felix Salmon looks at how the media covered a report of the effects of a takeover of Potash Corp. Felix finds the coverage often differed from the actual report. *View blog *View Reuters article

“The biggest merger in Australian business history is dead. The board of Rio Tinto is preparing to abandon a $120 billion iron ore deal with the rival mining giant BHP Billiton in the Pilbara,” reports The Sydney Morning Herald *View article

Doing the math on the AIG bailout and repayment isn’t all that hard, reports Andrew Ross Sorkin from the NYT. *View article

Deals wrap: Looking for a better deal

Potash Corp mill general superintendent Trevor Berg holds a handful of chicklet potash inside the Cory mine facilities near Saskatoon August 19, 2010.  REUTERS/David StobbePotash Corp’s search for buyers willing to top BHP Billiton’s $39 billion hostile offer may lead to China. “I am not saying that we are opposed to a sale, but what I am saying is we are opposed to a steal of the company,” said Potash Corp CEO Bill Doyle. Here’s a factbox on the current market for potash, and a graphic on BHP and Potash Corp.

“As an Intel-watcher for 30+ years, I have my doubts that this acquisition will work,” writes guest columnist Robert Cringely about Intel’s deal for McAfee. *View article

The NYT takes a look at Rio Tinto’s often troubled relationship with China, and how the mining company is working hard to patch things up. *View NYT article

Noted: Why BHP won’t revisit Rio

The year-long ban BHP Billiton has had on revisiting a takeover of rival miner Rio Tinto will soon end, but it seems as if the moment has passed. Liberum and Investec said earlier this week that most of the synergies were captured anyway by the duo’s iron-ore joint venture.  If regulators nix that deal, analysts say a full takeover could be back on — but how that would pass muster if a JV doesn’t is not clear. On Friday, Credit Suisse joined the chorus of disapproval, saying a takeover would cut BHP’s return on equity (ROE) in half. From the CS note:

“We have re-run the numbers on an all scrip BHP Billiton takeover of Rio Tinto at a 30% premium (2.3 BHP shares for each RIO share). We see such a deal as materially EPS dilutive (by 12% even after year 3) and would significantly decrease BHP’s return on equity (from 25% to 12%).

“We do not see BHP making another takeover offer for RIO because: (i) The iron ore JV should capture many of the synergy benefits expected from the possible merger. (ii) If the iron ore JV fails on account of not passing regulatory hurdles similarly then we do not see a takeover receiving regulatory passage. (iii) We do not foresee shareholder support for the deal (and any such deal would use BHP script) with the potential EPS dilution and ROE erosion significant. (iv) Non-availability of sufficient credit facilities.

China’s Iron Ire

Chinese demand for industrial commodities has long been the defining variable in establishing global market prices for everything from alumina to zinc. The modern engine of global manufacturing has made great strides toward embracing freer markets, but its deep roots in its command economy have clouded global markets’ ability to gauge demand. If Chinese allegations are true that Rio Tinto spied and adopted such unsavory tactics as bribery to gather market intelligence, the actions of the western company could be considered an attempt to attune its business practices to the local climate.

Share of Rio Tinto were sagging on Monday after China stepped up its spying allegations. China’s state secrets agency said on its website over the weekend that Rio Tinto had spied on Chinese steel mills for six years, resulting in the mills overpaying $102 billion for iron ore, Rio Tinto’s biggest earner. Australia’s Foreign Ministry says there’s nothing new in the latest allegations. Rio declined to comment on the accusations, which followed China’s detention a month ago of four Rio employees in Shanghai, including Australian Stern Hu, on suspicion of stealing state secrets.

When considering China’s motivation in this political drama, the brutal realities of the marketplace are also a key consideration. “Most observers see a link between the detentions and Chinalco’s failed attempt to up its Rio stake,”  according to Reuters columnist John Kemp. “While a direct link is hard to prove, there is no doubt the allegations have been prompted by high-level frustration at the way the annual ore negotiations have been conducted.”

X-raying Xstrata

Xstrata is different from most other major mining companies. Rather than being a long established group with strong links to a particular country, such as Australia for Rio and BHP, South Africa for Anglo American, or Brazil for Vale, it is a relative upstart with few ties to any particular territory, aside from its tax inspired domicile, Switzerland.

The group’s culture might seem innocuous but it is important, particularly when Xstrata has this week proposed a “merger of equals” with South African stalwart Anglo American. Unlike many of its rivals, Xstrata’s raison d’etre is doing deals, led by raucous chief executive Mick Davis.

The company floated in March 2002 with an initial value of £2 billion. Since then, a number of transformational acquisitions such as the $19 billion purchase of Falconbridge, and the recovery in global commodity prices, has meant the group is now valued at £20 billion. At its record high last year, when it tried to buy platinum producer Lonmin, it was worth £67 billion.

Xstrata’s clash of Anglo American culture

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”.

Steeling for a fight

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.