From: Reuters
Published February 12, 2008 05:17 AM

Xstrata slips on fears suitor Vale to walk away

By Eric Onstad and Mark Potter

LONDON (Reuters) - Shares in Xstrata <XTA.L> slid on Tuesday after a newspaper reported the Anglo-Swiss miner had rejected a $76 billion takeover approach from Brazil's Vale <VALE5.SA> and that its suitor was close to walking away.

Xstrata shares, which have shot up 15 percent over the past three weeks, shed 2.4 percent to 37.15 pounds by 4:45 a.m. EST. They lagged a 0.6 percent rise in the UK mining index <.FTNMX1770> and were one of the biggest losers on the FTSE 100 <.FTSE>.

The Financial Times quoted people close to the matter as saying London-listed Xstrata and its 35-percent shareholder, Swiss commodities trader Glencore, had rejected a cash-and-shares proposal pitched at just under 40 pounds a share and were holding out for about 45 pounds a share.

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Xstrata and Glencore declined to comment while Vale could not immediately be reached.

"The two sides are nowhere near to an agreement," the Financial Times quoted a person close to Vale as saying, who added that the Brazilian group was "close to walking away from the whole thing."

An analyst in London who declined to be identified said a price for Xstrata above 40 pounds per share would be a strain for Vale <RIO.N>, the world's biggest iron ore producer.

"If you run the maths for a Vale bid, the problem is that at the 40-pound-plus level, it's quite a stretch in terms of decent gearing ratios and something you could take to a bank."

The Financial Times said Vale planned to use $50 billion of bank finance to fund the cash portion of its proposed bid and to pay the rest in preference shares.

Xstrata and Rio Tinto <RIO.L>, another bid target, are more highly valued that their peers at price earnings ratios of 19 and 20 respectively. Rio's suitor BHP Billiton <BLT.L> has a PE of 13, while Anglo American <AAL.L> and Vale both are on 12.

MERGER WAVE

Tobias Woerner, mining analyst at MF Global Securities in London, said Vale might have to bid well above 45 pounds a share to win over Xstrata's other shareholders.

"I would want to have closer to 50 (pounds) if not above. Glencore may have different views, because it can gain from the marketing agreements of the enlarged group," he said.

The other analyst said Vale might be happy to wait until prices are agreed on iron ore contracts for the coming year from April since an expected strong increase could support its efforts to arrange financing for a bid.

Booming demand from China and tight supplies could push up iron ore prices by 60 percent or more, analysts have said.

Vale said last month it was in talks over a possible bid for Xstrata to diversify its mining interests. A deal would give it significant production of copper and zinc and also lift it ahead of Russia's Norilsk Nickel <GMKN.MM> to become the world's biggest nickel miner.

A deal would be the largest ever by a Brazilian company and would come amidst a wave of mergers and acquisitions in the mining industry as companies jostle to secure scarce resources and gain a bigger slice of a boom in commodities prices driven by rapid urbanization in China.

Rio Tinto <RIO.AX>, the world's second-biggest miner by market value, last week rejected an improved $147 billion all-share offer from bigger rival BHP Billiton BHP.AX>.

From a small, Swiss-domiciled producer of steel alloys known as Sudelektra Holding AG in the late 1990s, Xstrata has grown rapidly through mergers and acquisitions to challenge the world's biggest miners.

A takeover by Vale would bring together Canada's former two top nickel producers -- Inco, which Vale bought in 2006 for $17 billion, and Falconbridge, which was bought by Xstrata.

Analysts and media have speculated that Anglo American <AGLJ.J> might also be interested in a tie-up with Xstrata, or that Rio Tinto might look at the Anglo-Swiss company as a way of fending off BHP Billiton.

Britain's Telegraph newspaper said last week that China Development Bank had held talks with Glencore about buying its stake in Xstrata. Earlier this month, the bank backed Aluminum Corp of China's purchase of a 12 percent stake in Rio Tinto's London-listed shares, sources close to the matter have said.

(Additional reporting by Miyoung Kim; Editing by Quentin Bryar and Erica Billingham)

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