Xstrata's bid for Anglo reaches crucial stage

Tensions behind Xstrata's proposed "merger of equals" bid for its rival mining giant Anglo American are likely to reach a head in the coming weeks as analysts say the group is increasingly likely to walk away from the proposed deal, while Anglo could force the matter by approaching the Takeover Panel.

Xstrata says its nil premium offer is justified by the £1bn in costs savings it could generate, and has ruled out offering a premium to Anglo's shareholders. Anglo American has dismissed the approach as "totally unacceptable" but is conscious that a number of shareholders have been critical of chief executive Cynthia Carroll's steadfast refusal to countenance consolidation moves.

Anglo's new chairman Sir John Parker has spent the first six weeks of his tenure meeting key shareholders to gauge support for Xstrata's move. Anglo's stance has been helped by rising metal prices in recent weeks.

In response to weekend press reports that the company is about to approach the Takeover Panel and demand that Xstrata "put up or shut up", a spokesman for Anglo said: "Put up or shut up is something we keep under constant review." It is understood, however, that such a move is unlikely to happen imminently.

Action by the Takeover Panel would force Xstrata to show its hand on any premium it may be willing to add to its initial offer. Like Ms Carroll, Xstrata's chief executive Mick Davis has been under pressure to make the case for the deal, but has been adamant that he will not add a premium.

Indeed, according to analysts at Barclays Capital, it may be Xstrata that pulls the plug on the proposed merger, warning that Anglo shares are likely to suffer as a result. "Based on our analysis, Xstrata is increasingly likely to walk away from its proposed nil-premium merger of equals with Anglo American," said Christopher LaFemina, a mining analyst at the bank. "Without this M&A support, and with company specific risks for Anglo we do not believe Anglo's premium valuation to its primary peers is appropriate at this time. We thus expect Anglo shares to underperform shares of our preferred miners, namely Xstrata and Rio Tinto."

Mr LaFemina argues that Xstrata is unlikely to offer a premium as it would "destroy value". A spokesperson for Xstrata refused to comment on either the Barclays Capital note, or on the Takeover Panel reports. In the past the group has said it expects the deal to take a long time to complete, possibly as long as two or even three years.

Xstrata believes the key to the deal is to persuade Anglo's shareholders that the synergies of a merger are sufficiently enticing. Investors in both groups, particularly those at Black Rock and Capital Group, have argued that significant savings could be made from a combination. The case for a merger 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 group has also pushed the case with Anglo's key South African investors. Both groups have significant coal mining operations in the country and last month Xstrata held a beauty parade of its assets in the country. Anglo American has a dual listing in London and Johannesburg, while Xstrata's shares trade in London and on the Swiss stock exchange.

Xstrata argues the market for its large copper and coal assets will recover quicker than that for Anglo's key platinum and iron-ore reserves.