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Was it marketing rights or price that killed off Brazilian miner Cia. Vale do Rio Doce's roughly $90 billion offer for Swiss peer Xstrata plc? Rio de Janeiro-based Vale, the world's biggest iron ore group, claims it was marketing.
In the immediate aftermath of the announcement Tuesday, March 25, that it had pulled its offer for Xstrata, Vale blamed the breakdown on Glencore International AG, the world's biggest commodity trader and controlling shareholder of Xstrata.
"The biggest difficulty for negotiations was that Glencore wanted an accord for trading commodities," Vale's chief executive Roger Agnelli told reporters in São Paulo, Brazil, late Tuesday.
Privately held Glencore holds 34.5% of Xstrata and markets the miner's nickel, cobalt, ferrochrome and vanadium production as well as receiving a per-ton payment for its role as adviser on coal sales. The trader had told Vale it wanted to extend that contract as part of its agreement to sell its stake in Xstrata. Vale said it couldn't agree, and apparently pulled out of the deal as a result.
Analysts are not convinced that is the whole truth.
"There was a price that this deal could have been done at and that looks to have been north of the about $90 billion Vale offered," said a London-based mining analyst who asked not to be named. "The issue of marketing rights looks like a red herring."
He noted that Vale's offer, which was partly in shares, would have been damaged by a recent dip in the value of its equity. The miner's share price had slipped from 62.65 reais at the start of March to as low as R$55 at the end of last week.
Vale had been hoping to use about $35.5 billion of shares in its offer, according to a February report in Brazilian newspaper O Estado de S. Paulo.
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Even as Vale's shares fell, Xstrata's own estimate of its value may have risen, driven by bullish markets for its key commodities.
"Copper and coal prices in particular have moved substantially since talks with Vale were announced in mid-January," Keith Watson, a London-based analyst with Evolution Securities Ltd. wrote in a note. "Copper has risen around 14% ... while coal forward prices have risen around 15%."
Xstrata's equity dipped Wednesday to close at 3,359 pence per share, down 177 pence, or 4.76%, on their previous close, valuing the company's equity at £34.6 billion ($69.3 billion). Analysts said the breakdown of the talks had stripped the company of its takeover premium but maintained that the business remained a likely target.
"In terms of size and asset base, it remains one of the names that is attractively positioned to participate in industry consolidation," Peter Mallin-Jones, a London-based analyst with Goldman Sachs International, said Wednesday.
Goldman said that without takeover speculation supporting Xstrata shares, a price of 3,300 pence per share, or 6.45 times forecast fiscal 2008 Ebitda, was probable.
Merrill Lynch & Co.'s Vicky Binns advised "buying aggressively at below 3,300 pence," in a note published Wednesday.
Zug, Switzerland-based Xstrata effectively put itself on the block in December in a move that was in large part a response to BHP Billiton Ltd.'s unsolicited $140 billion bid for Rio Tinto plc. Xstrata said it was talking to industry peers about potential deals and enlisted Deutsche Bank AG and J.P. Morgan Cazenove Ltd. for advice.
Vale confirmed its interest in Xstrata in January. Anglo American plc is seen as another potential Xstrata suitor.
Shares in Vale traded Wednesday afternoon on the São Paulo exchange at R$59.64, up R$1.48, or 5.2%, on their previous close, valuing the group's equity at R$275 billion ($158 billion).
