The target becomes the acquirer? Not so fast.
Stock price divergence undermines Vale's dealings with Xstrata
By Lina Saigol, M&A Editor
Published: February 15 2008 02:00 | Last updated: February 15 2008 02:00
Vale do Rio Doce
and Xstrata have been in serious discussions about a potential $90bn cash and share takeover for more than two weeks but the two mining groups seem to have reached an impasse.
The Brazilian mining group believes that Xstrata is worth between £40 and £42 a share, while Xstrata, and Glencore, its main shareholder, believe discussions about price should be at between £45 and £48 a share.
Given that Vale is likely to pay up to two-thirds of the value of the deal in shares, the significant divergence in the stock prices of the two miners' in recent weeks has become a problem.
"This is about relative valuation, not absolute valuation," one person close to the negotiations said. "There is evidently a different view on price between the two companies at the moment."
Since Xstrata confirmed to the stock market that it was in talks "with a number of parties" over industry consolidation on December 11, Vale's share price, which was at R$53.80 the day before the announcement, has since dropped by more than 11 per cent.
Meanwhile, Xstrata's shares, which were valued at £36.56 on the same day, have since risen by almost 6 per cent.
Further complicating the valuation issue is the fact that Vale has two classes of share on issue. Its voting shares, which are majority-owned by a small group of Brazilian investors, in effect control the company. The second class of preference shares does not have voting rights and trades at a discount to the voting shares. However, if the Brazilian group walks away from the talks now, Xstrata is likely to see its share price fall. "The commodity boom is over and the value of Xstrata's currency will go down if Vale decides not to pursue the takeover. That doesn't achieve much," one person familiar with the situation said.
Analysts at UBS have estimated that shares in Xstrata could fall as much as 20 per cent if Vale does not decide to pursue a formal offer for the Anglo-Swiss group.
However, Vale, Xstrata and Glencore, which owns 35 per cent of Xstrata, are understood to be in agreement on the structure of the deal, which would involve a straightforward takeover of Xstrata and leave just one listed company.
Vale is understood to have initially considered a more complex structure, which would have involved the creation of a London-listed company, which would hold all of Xstrata's existing assets along with Vale's copper, nickel and aluminium assets. This company would in turn own a stake in a new, unlisted Brazilian company which would hold Vale's iron ore assets.
There should be few antitrust hurdles if an agreement can be reached. Any review is expected to focus on nickel assets, as well as some iron ore and coal contract negotiations, although these are unlikely to take longer than six to nine months to clear.
The biggest asset which will have to be disposed of is the Nikkelverk refinery in Kristiansand, Norway, which Xstrata acquired as part of its takeover of Falconbridge in 2006.
Glencore will also only agree to a deal if it is able to take an equity stake in the new company, as well as secure the highly lucrative marketing rights to a significant part of the combined groups' commodity production.
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