Xstrata and Glencore Reject Vale's Cash Offer: Why?

Xstrata Plc (XSRAF.PK) and 35% shareholder Glencore International AG’s rejection of an informal cash and stock offer worth $76-billion, or just under £40 per share, from Brazilian mining group Vale ADR (RIO), could prove to be a risky move. Reports suggest Vale may walk away, as the two parties, which have been in talks since late last year, appear to be far apart with Xstrata looking for somewhere closer to £45 a share.

Since there appears to be only one buyer for Xstrata, it and Glencore may be playing a dangerous game, UBS analyst Paul Galloway told clients in a note. He estimates that Xstrata shares could fall as much as 20% if the deal does not go through, while the upside to his £42 takeout target is only 10%.

The fact that Vale has reportedly raised $50-billion in debt facilities suggests it is engaged, Mr. Galloway said, adding that at £45 per share, the Chinese may also be interested. He also noted that at this price, Anglo American Plc (AAUK) is likely not interested.

Since Xstrata seems willing to sell, the key question naturally, is price. The analyst sees the most likely successful outcome will be one-third paper and two-thirds cash. He also suggested that any delay would likely be the result of an anti-trust review of nickel assets, which could take around six months to complete. Iron ore and coal contract negotiations could also postpone the deal.

Combining Xstrata and Vale would create the world’s biggest mining company, overtaking BHP Billiton Plc (BHP), which has a $147-billion takeover offer for rival Anglo-Australian miner Rio Tinto Plc (RTP) on the table.