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Will Xstrata-Glencore Trigger a Bidding War?

Should the combined Xstrata-Glencore make a move for Anglo American, it could trigger a battle of the miners, says Morningstar's Daniel Rohr

Holly Cook 8 February, 2012 | 9:42AM

Not long after Xstrata (XTA) announced it was in discussions with Glencore (GLEN) regarding a potential merger of equals, the two firms announced Feb. 7 that they had agreed to the specifics of the tie up. The terms include a fairly modest premium for Xstrata, which has produced grumbling among some institutional investors. On balance, however, investors seem to view the deal in a positive light, particularly as it concerns the potential for the combined entity to be worth quite a bit more than the sum of its parts. Morningstar equity analyst Daniel Rohr takes a more circumspect view with respect to prospective synergies, however. Based on Glencore's share price at the Feb. 7 close, the deal values Xstrata shares at 1,265.94 pence--a shade below Rohr's 1,300 pence-per-share fair value estimate.

"While the combined entity may indeed be worth more than the sum of its parts, media coverage and investment bank commentary have tended to overstate the benefits of a tie-up, in our view," writes Rohr in his Feb. 7 analyst note. "We certainly expect some marketing benefits from the tie-up and intend to include such synergies in our new fair value estimate," Rohr adds, "But we're decidedly less optimistic than the emerging conventional wisdom on the topic, which seems to view that giving Glencore control of Xstrata mine output as an unmitigated benefit from a value maximisation perspective."

Rohr points out that some have speculated that the Glencore-Xstrata tie-up is an opening act to a renewed approach at Anglo American (AAL)--"the ultimate big-game prize" for Xstrata's South African CEO Mick Davis and erstwhile Glencore CEO Ivan Glasenberg. "A bid for Anglo or any other large, high-profile miner [from the combined Glencore-Xstrata entity] is sure to attract bids from peers," says Rohr, adding that this would "set the stage for a classic 'winner's curse' scenario that tends to generate phenomenal returns for the target, but suboptimal outcomes for the acquisitor."

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Holly Cook

Holly Cook  is Managing Editor of Morningstar.co.uk