The mining giant Xstrata confirmed yesterday that it has approached its rival Anglo American about a potential £41bn merger.
A tie-up between two of the world's biggest natural resources groups was mooted by Xstrata's chief executive Mick Davis, who last week wrote to Anglo American's board to suggest an opening of talks. An official announcement could be made to the stock exchange as early as this morning.
"Xstrata believes a merger of these two world-class companies with complementary assets is highly compelling. 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 has already quantified substantial operational synergies from the combination that are not available to either company operating alone," the group said in a statement yesterday.
Mr Davis has been under pressure to make the case for a merger from some of Xstrata's investors for some time. Those at Black Rock and Capital Group in particular have argued that significant cost-savings could be made from combining the two companies. The case gained further momentum after analysts at the Japanese investment bank Nomura said a deal could generate savings of as much as £423m a year. The two groups have similar coal assets in Australia and South Africa, as well as complementary copper operations.
Any agreement is likely to take a long time, with news of the tentative approach being leaked before either company was ready. An agreement would also have to overcome Cynthia Carroll's reticence towards a merger deal. The Anglo American chief executive has long argued that the group's shareholders are best served by it remaining independent. A source close to the company intimated yesterday that Xstrata will have to overcome several objections to secure an agreement.
However, while a deal would likely be a merger rather than a takeover, given the similar size of the two companies, Xstrata's offer may well have been timed to take advantage of Anglo American's unsettled boardroom.
Ms Carroll has come under pressure in recent months from shareholders that have questioned the strategy of not seeking to consolidate, while the group has also been rocked by the criticism it has had over its efforts to find a new chairman. The board had proposed the chairman of National Grid Sir John Parker to replace the outgoing Sir Mark Moody-Stuart, but this has met opposition from the South African government and several investors who believe the job should go to a South African.
The Nomura analysts have also pointed to the likelihood of Anglo American being forced into a deal with one of its rivals: "Anglo may be facing an identity crisis that could leave the company vulnerable to takeover," they said.
Another potential stumbling block is the Swiss commodities group Glencore International, which owns 34 per cent of Xstrata. Reports suggested yesterday that the secretive group had been made aware of the approach and were supportive, but Glencore is also thought to be planning an IPO and could feel that two big deals at once gives it too much to do at the same time.
News of a formal approach could also spark a new round of deals in the mining sector. Vale, the Brazilian group which has previously courted Xstrata is also known to be keen on Anglo American, while others, such as BHP Billiton, would also be eager to to buy up assets.