Australian miner Oxiana Ltd launched an agreed A$6.1 billion ($5.7 billion) takeover offer for Zinifex Ltd on Monday, looking to diversify to benefit from booming global minerals demand.
The move comes at a time when big global miners have been making bold takeover bids. BHP Billiton Ltd, the world's top miner, has made an all-stock $147 billion offer for rival Rio Tinto Ltd, while Brazil's Vale has launched a $90 billion offer for Xstrata.
Consolidation in global miners is driven by expectations of continued strong demand for base metals from China and India as the two Asian economies grow rapidly.
Shares in Zinifex rose 9.2 percent to A$12.15, but traded below the offer, suggesting that traders were not expecting a higher bid.
I would have thought that Oxiana would be more the one people looked at as a target. So in some ways, it's a bit of a protection for Oxiana from being taken over itself, said Steve Robinson, a fund manager with Alleron Investment Management.
Zinifex has got good cash flows which Oxiana can potentially use to fund its own organic growth, he added.
Oxiana shares fell 1.8 percent.
Oxiana had pretty good growth profile going forward, but this kind of dilutes that because Zinifex doesn't have a lot of organic growth if you look at their production profile, Robinson said.
A tie-up of the two miners would create a diversified miner with a market value of A$11.5 billion and mines in Australia and Asia. It would merge Zinifex, the world's No. 2 zinc miner after Xstrata, with sizeable production of copper, lead, gold and silver.
Oxiana's offer valued Zinifex at A$12.68, a 14 percent premium to Zinifex's Friday's close. That is still a far cry from Zinifex's life high of A$21.60 reached in July 2007.
Price of Zinc, a key ingredient in making steel, has risen 16.5 percent year to date, but down nearly 40 percent from their peak in late 2006.
The two companies told a joint news conference that integration was their top priority though they would continue to look for more acquisitions outside Australia.
The companies have agreed that they won't be out there soliciting bids, that's not the intention, said Owen Hegarty, managing director of Oxiana.
Each company agreed to pay the other an A$55 million break fee if they sought alternative transactions.
The combined group would become Australia's third-biggest diversified company by market value behind BHP and Rio, the two companies said in a presentation.
The combination makes strong strategic sense, Zinifex Chief Executive Andrew Michelmore, who will head up the merged company, said. The combined group would have earned 63 percent of revenue from zinc, 23 percent from copper and the rest from gold, lead and silver based on their December 2007 proforma output.
The proposed deal has been rumored since July last year, when Oxiana chief executive Hegarty said in an interview that Zinifex had quality assets and a takeover would create cost savings.
Morgan Stanley was advising Oxiana while UBS and Lazard Carnegie Wylie were the financial advisers to Zinifex.
ALL STOCK DEAL
Oxiana would offer 3.2 of its shares for each Zinifex share, and the new entity would be equally held by shareholders of each negotiations conclude in April.
Zinifex trades at a fiscal 2008 price-to-earnings multiple of 10.6, compared with 13.5 for Xstrata and 10.3 for Canada's Teck Cominco Ltd (TCKb.TO: Quote, Profile, Research), according to Reuters data.
The new company, to be renamed after the deal is completed around June or July, would have combined earnings before interest, tax, depreciation and amortization (EBITDA) of A$1.7 billion and a cash balance of A$1.9 billion.
Oxiana Chairman Barry Cusack will chair the new company, while Hegarty will become a director.
Zinifex reshaped itself as a pure miner last year with the spin-off of its smelting assets into Nyrstar (NYR.BR: Quote, Profile, Research), a venture with Belgium's Umicore NV/SA ACUMt.BR.
Zinifex said its recommended A$852 million takeover offer for Australian nickel group Allegiance Mining Ltd (AGM.AX: Quote, Profile, Research) will not be affected by the Oxiana proposal.