The Wall Street Journal-20080122-Brazilian Mining Firm Vale Courts Xstrata
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Brazilian Mining Firm Vale Courts Xstrata
Brazil's Companhia Vale do Rio Doce is in talks to buy Swiss miner Xstrata PLC that could result in a deal valued at as much as $90 billion and create a new global mining powerhouse.
A deal would mark the latest move in the global mining industry's arms race, as miners move to get big fast and cash in on a commodities boom. A separate effort by mining's largest company by market capitalization, BHP Billiton, to acquire fellow Anglo-Australian miner Rio Tinto has put pressure on rivals to keep up.
Whether a deal for Xstrata moves forward depends partly on the ability of the Brazilian company, known as Vale, to raise cash needed to complete the deal. Vale said yesterday it has been in discussions with several banks about financing but cited difficult market conditions.
Underscoring that point, European and Asian financial markets took a beating yesterday on rising concerns about the likelihood of a U.S. recession. Vale shares in Brazil yesterday fell 10% to 46.22 reals ($25.81), and Xstrata stock in London fell 5.5% to GBP 31.79 ($62.13) as part of broader market selloffs.
"The current conditions prevailing in the global financial markets may constrain the realization of a major strategic move," Vale, the world's largest maker by output of iron ore, a component of steel, said in a statement. It also said it had been evaluating other possible deals, though the company gave no details.
Any deal involving Xstrata will hinge on approval from Glencore International AG, a closely held oil and commodities-trading company that is Xstrata's largest shareholder with 34.7% stake, and which markets a significant portion of the mining company's output through long-term agreements.
A person close to Vale said a deal could come together in as little two to three weeks, but put even odds on whether the companies would be able to reach an arrangement. Any offer is expected to reach a value of between $80 billion and $90 billion, this person said. A Vale spokeswoman declined to comment on the terms being discussed. Xstrata has a market value of $63.85 billion. An Xstrata spokeswoman declined to comment.
Strong demand for iron ore, coal, copper and other commodities in China and elsewhere have led to high prices and given mining companies big war chests. That has put increased pressure on them to bulk up with key resources before other competitors snap them up. "It's a big boys' game. You can see there is a lot of M&A, and it's only been intensifying," said Roger Downey, a mining equity analyst at Credit Suisse in Sao Paulo.
The commodities business has been a rare bright spot in an otherwise sluggish mergers-and-acquisitions environment. Vale may feel urgency to ink a deal before BHP and Rio do. With the debt market stretched thin, the capacity for funding one massive cash-backed deal, let alone two, could be a tall order for bankers.
The merger negotiations could determine who emerges as the world's largest mining operation. If BHP decides against formalizing its offer for Rio, the company is likely look for other targets. A move by Vale to pick up Xstrata would make the Brazilian company too large, and costly, for any rival to swallow.
If either deal goes trough, they would rank among the biggest acquisitions ever in any industry, close behind AOL's takeover of Time Warner, which was valued at about $103 billion at closing in 2001.
The deal for Xstrata also would be the largest foreign acquisition ever by a Brazilian company. In December, Vale's president and chief executive, Roger Agnelli, said the company hoped to become the world's top mining company, overtaking BHP Billiton. Vale has been expanding at home and abroad, including in China, Canada and Australia, most recently with the $17 billion acquisition of Canada's Inco Ltd., a nickel miner.
As Xstrata's largest shareholder, Glencore, of Baar, Switzerland, has the power to make or break this deal. In general, under U.K. law, anyone buying Xstrata would need the approval of at least 70% of its shareholders, a person familiar with the discussions said. If Glencore opposed the deal, the maximum Vale could purchase is 65% of Xstrata, but Vale couldn't combine the two companies and use Xstrata's cash flow to support the debt it might need to issue to pull off the deal, the person added. Glencore was founded by U.S. financier and one-time fugitive Marc Rich, though he is no longer associated with the firm.
Glencore also holds long-term agreements to market a significant portion of Xstrata's mining output. If the Vale deal went forward, people familiar with the deal talks said the firm would want to keep those marketing rights and take shares in the bigger company rather than sell its 35% stake. Glencore has repeatedly declined to sell stakes in companies in which it held stakes and instead has negotiated for a stake in the new company as well as an even bigger role marketing the larger company's output.
A deal between Vale and Xstrata would give Vale a more diverse geographical reach and a dominant position in nickel, which is used to make higher-grade stainless steel used in appliances. It also would expand its holdings in metals such as zinc and copper. With Xstrata, Vale would get coal and copper reserves in eastern Australia, an easier location to serve China.
Xstrata, which in 2001 was essentially a nickel company, has since bought its way into seven major commodity markets, including precious and base metals along with coal. But Xstrata has also been an object of takeover rumors, as larger companies have looked to expand into new metals.
For the first six months of last year, Xstrata reported profit of $3.15 billion on revenue of $14.23 billion, based on international financial accounting standards, which differ from U.S. generally accepted accounting principles.
Vale and Xstrata would together become a powerhouse in the nickel market, tightening supplies and concentrating power into one company. Nickel prices, as with those of other metals, had been on the upswing, but have fallen in recent months reflecting concerns about the U.S. economy.
Vale is fast becoming one of the big success stories in emerging markets. Its market capitalization has soared from $10 billion a decade ago to about $137 billion today, as it swept up smaller rivals.
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Robert Guy Matthews in Melbourne and Dana Cimilluca in New York contributed to this article.
