It is decision time for the mining giant Xstrata. By 5pm on 20 October, Mick Davis, its chief executive, must work out just how serious he is about the nil premium, so-called "merger of equals" bid for rival Anglo American. That is the "put up or shut up" deadline given to Xstrata by the Takeover Panel last week after months of shadow boxing.
The Anglo-Swiss group insists that all options are open, and that it could yet surprise everyone by offering a premium, but all the signs point to Xstrata walking away from the deal or formalising its nil premium approach, especially as Anglo's increasingly confident management has stepped up its opposition in recent weeks.
Since news of the bid leaked in June, Xstrata has tried to convince Anglo's shareholders that the £1bn of combined savings a year alone it is offering justify the deal. It would appear that Anglo's shareholders have largely decided otherwise.
Sir John Parker, who became the group's chairman at the start of August, has spent his first two months sounding out the group's investors; many see the logic, but want some bang for their buck.
Sir John is hearing what he wants to, and after initially greeting news of Xstrata's approach with the stock response – "the terms proposed by Xstrata were totally unacceptable" – the stance has become more dismissive in recent weeks, with the bid labelled a "distraction".
All this puts Mr Davis in a difficult position. Having failed to persuade Anglo's shareholders of the merits of the deal, without a premium, he can either reaffirm the nil premium offer, or walk away. Having refused to countenance paying up, it seems the deal will hit the scrapheap, at least for now.
"While the economics of a nil- premium merger of equals with Anglo American may now be somewhat favourable for Xstrata, we do not believe such a merger is possible," reckons Christopher LaFemina, an analyst at Barclays Capital. "It is clear to us that Anglo's board and shareholders will likely demand a premium. We believe a 30 per cent premium might be high enough for a friendly merger."
Mr LaFemina points out that a 30 per cent premium "would be 10 per cent dilutive on average over the first five years and still 2 per cent dilutive in year five".
Round one then, it seems, to Anglo American. But even a decision by Mr Davis to walk away on 20 October does not signal the end of the battle. The case for synergies has been made, and while Anglo shareholders have been lukewarm about the deal on the table so far, appetites have been whetted.
Those at BlackRock and Capital Group, for example, have argued that significant savings could be made by a combined company, and by formalising the offer, even if it is rejected, as seems likely, Xstrata could spend the next six months working on regulatory aspects of the bid. "Waiting six months could bring more options for Xstrata," says Michael Rawlinson of Liberum Capital. "They will have delevered more, they will have delivered better second-half earnings than their peers, and, they hope, Anglo will be over half way through the delivery of its cost-saving programme – so the promises of future upside will be lower."
Xstrata has always been earnest about the bid, even if its reluctance to offer a premium has suggested that the bid was speculative. The group has strong coal and copper assets in South Africa and Latin American that strengthens its performance during the early stage of the cycle. However, three or four years down the line, the group knows it will face pressure as the prices of other commodities peak. Anglo is thus attractive because as well as coal and copper, where costs can be saved, it also boosts impressive platinum and diamond assets.
Still, Xstrata does have other options. Last October it walked away from Lonmin, the world's third biggest platinum producer, after buying up a 24.9 per cent stake. "We believe that Xstrata considers a possible acquisition of Lonmin to be an attractive 'Plan B' whereas an acquisition of Anglo is 'Plan A'", says Mr LaFemina.
Xstrata's shares have fallen by 10 per cent since its last bid for Lonmin a year ago, and while it will, in the end, want to do something with its stake – including possibly selling it to fund another bid for Anglo – it can happily sit on the stock for the foreseeable future. Mr LaFemina points out that Xstrata can use the shares to block other approaches, but buying the stock it does not own would signal an end to its Anglo ambitions on competition grounds.
While time is on Xstrata's side, Anglo's management team, led by chief executive Cynthia Carroll, may find itself under more pressure. "The defensiveness of Anglo American management presents an obstacle to advancement," argues Andrew Gardner, an analyst at MF Global.
Having seen Xstrata's offer of savings, investors will want to see a change at Anglo. News that it could sell a 30 per cent share of its huge Minas Rio iron ore plant to the Chinese steel group Baosteel would help, but even with a reprieve now, Ms Carroll can't assume an Xstrata deal is off for good.
Tale of the tape: Xstrata versus Anglo American
*Xstrata has a market capitalisation of £25.3bn and is listed in London and Switzerland.
*The group's key assets are coal and copper. It has thermal coal mines in Australia and South Africa, as well as copper reserves in Latin America.
*Xstrata said in August that attributable profit had fallen by 68 per cent in the half year to 30 June; earnings per share (EPS) were down 77 per cent.
*Chief executive Mick Davis was appointed in October 2001 and is a former financial director of Billiton.
*Anglo American has listings in London and Johannesburg. The group has a market capitalisation of £25.7bn.
*Anglo is well diversified, with coal and platinum assets in South Africa, copper in Latin America and diamonds in Canada and Africa.
*In half-year results published in July, Anglo said operating profits had slipped by 65.6 per cent, while EPS fell 68.6 per cent.
*Cynthia Carroll became chief executive in March 2007. She is the former boss of Alcan's Primary Metal Group.