M&A wrap: Buffett trades off his reputation
Warren Buffett showed again that his name and money is enough to give a struggling company instant credibility in the market. But the legendary investor also demonstrated his canny command of that reputation means that deals such as the $5 billion investment in Bank of America can immediately generate profits.
Anglo-Irish bank has chosen preferred bidders for its $9.5 billion U.S. commercial real estate loan portfolio and aims to have completed that sale, the largest in the United States in recent years, before the end of the year.
Glencore, the world’s largest commodities trader, stood on the verge of its largest takeover bid since its May stock market listing, after South Africa’s Optimum Coal confirmed it had received approaches.
The New York Times’ Dealbook is reporting that Rio Tinto and the Mitsubishi Corporation have raised their offer for Coal & Allied to approximately $131 a share , valuing the company at about $11.6 billion.
The blogging service Tumblr is close to raising $75-$100 million in venture capital, implying a market value of $800 million, the Wall Street Journal reported, citing people familiar with the matter.
Deals wrap: GE to slow M&A warpath
General Electric continued on its M&A warpath with a $3.2 billion agreement to acquire France’s Coverteam, a maker of automation systems used in the oil and gas sector, marking the latest in a series of deals in the energy industry. But, after some $11 billion in acquisitions in the energy sector over the past six months, GE plans to slow its pace of dealmaking, a top executive said.
Rio Tinto said it would go ahead with its A$3.9 billion ($4 billion) takeover offer for Riversdale Mining even if it ended up with a minority stake in the Mozambique-focused coal miner.
Canada’s federal election could add a fresh element of uncertainty to the London Stock Exchange‘s proposed C$3 billion ($3.1 billion) takeover of TMX Group, a deal which was already seen as far from a sure thing, writes Cameron French.
As lenders tighten mortgage standards and consumers stay on the sidelines amid a five-year slide in home prices, all-cash purchases are surging, writes Bloomerg’s John Gittelsohn. The deals are done mostly by investors who can get properties for less than buyers needing loans, fix them up and resell or rent them.
Deals wrap: Power merger
Northeast Utilities will buy peer NSTAR in a $4.17 billion all-stock deal to create one of the largest U.S. utilities. *View article
BHP Billiton and Rio Tinto scrapped a plan for a $116 billion iron ore joint venture. The announcement was widely expected and could result in both miners stepping up competing expansions. *View article *View reaction “The strong interest from traditional funds and high-profile Chinese investors in the sale of the unit of American International Group comes amid a flood of Asian IPOs that have cemented the region’s dominance in initial public offerings this year,” reports Denny Thomas and Kennix Chim. *View AIA article *View article on the IPO fee bonanza
Groupon’s valuation has been growing fast but don’t expect the company to have the same success as Ebay, writes TechCrunch’s Michael Arrington. *View article
Deals wrap: Viewing Potash through the media
Reuters blogger Felix Salmon looks at how the media covered a report of the effects of a takeover of Potash Corp. Felix finds the coverage often differed from the actual report. *View blog *View Reuters article
“The biggest merger in Australian business history is dead. The board of Rio Tinto is preparing to abandon a $120 billion iron ore deal with the rival mining giant BHP Billiton in the Pilbara,” reports The Sydney Morning Herald *View article
Doing the math on the AIG bailout and repayment isn’t all that hard, reports Andrew Ross Sorkin from the NYT. *View article
Dollar Thrifty shareholders rejected Hertz’s takeover bid last week. Avis continues to be interested in Dollar Thrifty. The NYT takes a look at where the three companies can go from here. *View article
Deals wrap: Looking for a better deal
Potash Corp’s search for buyers willing to top BHP Billiton’s $39 billion hostile offer may lead to China. “I am not saying that we are opposed to a sale, but what I am saying is we are opposed to a steal of the company,” said Potash Corp CEO Bill Doyle. Here’s a factbox on the current market for potash, and a graphic on BHP and Potash Corp.
“As an Intel-watcher for 30+ years, I have my doubts that this acquisition will work,” writes guest columnist Robert Cringely about Intel’s deal for McAfee. *View article
The NYT takes a look at Rio Tinto’s often troubled relationship with China, and how the mining company is working hard to patch things up. *View NYT article
Global M&A activity shatters typically one of the quietest months of the year. *View article *View the Investment Banking Scorecard *View WSJ wrap-up on this week’s moves
Noted: Why BHP won’t revisit Rio
The year-long ban BHP Billiton has had on revisiting a takeover of rival miner Rio Tinto will soon end, but it seems as if the moment has passed. Liberum and Investec said earlier this week that most of the synergies were captured anyway by the duo’s iron-ore joint venture. If regulators nix that deal, analysts say a full takeover could be back on — but how that would pass muster if a JV doesn’t is not clear. On Friday, Credit Suisse joined the chorus of disapproval, saying a takeover would cut BHP’s return on equity (ROE) in half. From the CS note:
“We have re-run the numbers on an all scrip BHP Billiton takeover of Rio Tinto at a 30% premium (2.3 BHP shares for each RIO share). We see such a deal as materially EPS dilutive (by 12% even after year 3) and would significantly decrease BHP’s return on equity (from 25% to 12%).
“We do not see BHP making another takeover offer for RIO because: (i) The iron ore JV should capture many of the synergy benefits expected from the possible merger. (ii) If the iron ore JV fails on account of not passing regulatory hurdles similarly then we do not see a takeover receiving regulatory passage. (iii) We do not foresee shareholder support for the deal (and any such deal would use BHP script) with the potential EPS dilution and ROE erosion significant. (iv) Non-availability of sufficient credit facilities.
“We see a reinstatement of the buyback as a more preferable option for BHP shareholders than another tilt at RIO. A buyback of US$18bn in FY11 would be 7% EPS accretive and return gearing to a more normal level of 25% (BHP is debt free by end FY11 on our current forecasts).”
When is this BHP – Rio non-news coverage going to stop ?There is nothing to report. BHP and Rio Tinto aren’t merging.The only possible explanation for more than two years of non-event coverage is that either BHP or Rio Tinto are paying to keep the non-event story alive in the media.
China’s Iron Ire
Chinese demand for industrial commodities has long been the defining variable in establishing global market prices for everything from alumina to zinc. The modern engine of global manufacturing has made great strides toward embracing freer markets, but its deep roots in its command economy have clouded global markets’ ability to gauge demand. If Chinese allegations are true that Rio Tinto spied and adopted such unsavory tactics as bribery to gather market intelligence, the actions of the western company could be considered an attempt to attune its business practices to the local climate.
Share of Rio Tinto were sagging on Monday after China stepped up its spying allegations. China’s state secrets agency said on its website over the weekend that Rio Tinto had spied on Chinese steel mills for six years, resulting in the mills overpaying $102 billion for iron ore, Rio Tinto’s biggest earner. Australia’s Foreign Ministry says there’s nothing new in the latest allegations. Rio declined to comment on the accusations, which followed China’s detention a month ago of four Rio employees in Shanghai, including Australian Stern Hu, on suspicion of stealing state secrets.
When considering China’s motivation in this political drama, the brutal realities of the marketplace are also a key consideration. “Most observers see a link between the detentions and Chinalco’s failed attempt to up its Rio stake,” according to Reuters columnist John Kemp. “While a direct link is hard to prove, there is no doubt the allegations have been prompted by high-level frustration at the way the annual ore negotiations have been conducted.”
X-raying Xstrata
Xstrata is different from most other major mining companies. Rather than being a long established group with strong links to a particular country, such as Australia for Rio and BHP, South Africa for Anglo American, or Brazil for Vale, it is a relative upstart with few ties to any particular territory, aside from its tax inspired domicile, Switzerland.
The group’s culture might seem innocuous but it is important, particularly when Xstrata has this week proposed a “merger of equals” with South African stalwart Anglo American. Unlike many of its rivals, Xstrata’s raison d’etre is doing deals, led by raucous chief executive Mick Davis.
The company floated in March 2002 with an initial value of £2 billion. Since then, a number of transformational acquisitions such as the $19 billion purchase of Falconbridge, and the recovery in global commodity prices, has meant the group is now valued at £20 billion. At its record high last year, when it tried to buy platinum producer Lonmin, it was worth £67 billion.
Xstrata’s strength is that it has always been much closer to its customers than other, perhaps more parochial groups keener on looking after their employees. The presence of trading entity Glencore on its shareholder register, with a third of Xstrata’s stock, is testament to this.
Davis’s true loyalty showed earlier this year when he effectively enabled Glencore to retain this stake, by funding its participation in January’s £4.1 billion rights issue, via a side deal selling certain Glencore coal assets in Colombia to the group for $2 billion.
The current tilt at Anglo American, now worth £24 billion, looks a deal too far for Xstrata. For one, Glencore looks likely to be diluted down to a sixth of the combined group, as the proposal currently lies. Secondly, Anglo American will vigorously defend its independence, as it is already showing, helped by implicit South African support.
Glencore must have approved Xstrata’s move but that in effect puts Xstrata in play, if it is indeed willing to effectively relinquish control. That is highly significant. The end result might either see Anglo American making a “pacman” offer for Xstrata to defend itself or else encourage Vale, which has approached Xstrata before, to make a play for it.
Mick Davis may have put himself in the spotlight, if this Anglo deal falls through Xstrata can become a takeover target itself. The Chinese are still looking for an acquisition after the failed Rio deal, Xtrata and Anglo are both nice snacks for a cash loaded company like Chinalco.
Xstrata’s clash of Anglo American culture
Just when you thought M&A was dead, along comes the $68bn “merger of equals” proposal between Anglo-Swiss mining giant Xstrata and rival Anglo American.
Xstrata confirmed over the weekend that its chief executive Mick Davis recently wrote to Anglo American’s outgoing chairman Sir Mark Moody-Stuart about doing a deal. On the back of that, Anglo’s shares surged as much as 12.4 percent before falling back during Monday’s trading. Spurred on by uncertainty in the global economy, a need for substantial cost-savings, the recent merger of Rio Tinto’s iron ore business with that of BHP Billiton’s – and a belief that Xstrata must double its size to catch its closest competitor, Rio Tinto – and you have the rationale behind Davis’s thinking.
“The combination would create a premier portfolio of operations diversified across multiple commodities and geographies, with enhanced scale and financial flexibility to fund future growth,” Xstrata said in a statement. According to Citi analysts, the deal “makes financial and strategic sense, and could create synergies of up to $750m. The combined entity would be a global leader in base metals, platinum, ferrochrome and coal”.
Put another way, the new company would be number one in zinc and platinum production, as well as thermal export coal and ferrochrome. It would be number two in copper, number four in nickel, and number five in iron ore and coke. Even though metal prices have made major gains for the year to-date, mainly driven by robust Chinese industrial activity and restocking, Chinese imports of those commodities are slowing. Xstrata sees a tie-up with Anglo American as a defensive move.
While some of Xstrata’s major shareholders – including Glencore, BlackRock and Capital Group – are said to be behind such a merger, Xstrata’s financial advisers, Deutsche Bank and JPMorgan Cazenove, will be facing substantial difficulties to close a deal. Already, Anglo American’s advisers, Goldman Sachs and UBS, are mounting their client’s defence. Apparently, Anglo’s assets are better quality and have more durability. “Why would you want to dilute that portfolio with lower value assets?” an informed source told Reuters.
There would also be a clash of cultures between the two mining groups. Anglo American’s chief executive Cynthia Carroll is understood to have a more command-and-control style, while Davis believes in more self-autonomy of business units. Indeed, Carroll has so far not been persuaded by Davis’s overtures since Xstrata recapitalised its balance sheet with a $5.9 billion rights issue in March. “Anglo’s reluctance to do a deal and the stark difference in corporate cultures make a tie-up a possibility rather than a probability, in our view,” Citi stated.
It is also unlikely that Xstrata could go hostile since that would rankle the South African government, which has a 5.5 percent stake in Anglo through the Public Investment Corporation.
I heard rumours that Chinalco is also interested in acquiring Anglo American, after the failed Rio deal they are still looking for a takeover target.
If this XStrata Anglo deal fails, then both companies run the risk of becoming a takeover target. There is plenty of interest from resource hungry and cash loaded Asia.
Steeling for a fight
If the global recession wasn’t enough, with its idled auto factories and demand dwindling from the construction to the ship-building industries, the world’s steelmakers are facing the kind of consolidation that could well be a transformative event for the business.
Coal giant Xstrata aims to buy Anglo American for $68 billion in a tie-up between two of the biggest iron ore suppliers, creating the second-largest producer of steel-making coals. The move follows joint-venture plans from ore suppliers BHP Billiton and Rio Tinto and is seen as a big threat to steelmakers’ ability to exert any control over falling prices. Expect plenty of opposition from governments about too much pricing power residing in too few hands.
But the deal has other obstacles as well. Xstrata is offering effectively no premium to Anglo shareholders, which is producing loud squawks of outrage from investors. Perhaps by the time this one gets ironed out, the global recovery will be in full swing.
The Xstrata/Anglo deal is probalby going to be all the rage at the annual Steel Survival Strategies conference, which kicks off in New York on Tuesday with executives from U.S. Steel, ArcelorMittal and AK Stee expected to speak.
China in particular will feel gutted about this, after failing to break up the BHP Rio powerhouse, this tie-up is another blow to their strategic plans. I wouldn’t be surprised though if they put in an offer for Anglo as well.
