takeover talks keep oxiana buoyed, page-6

Crashing the wedding

If Xstrata, or anyone else, wants to gatecrash the proposed "merger of equals" between Oxiana and Zinifex the window of opportunity has just opened.
The scheme documentation for the merger was released yesterday, which means the clock is now ticking for the countdown to the June 16 meeting of Zinifex shareholders to vote on the merger.

There have been persistent rumours that Xstrata has been sizing up Oxiana, with a view to moving on it ahead of the merger’s consummation. Now that all the most current information about the group and the merger is on the table, if there is to be a counter-proposal there are only weeks left within which to table it.

While Oxiana’s share price has been volatile since the merger was announced in early March, there are no obvious signs that the market expects anyone to spoil the merger. Both companies’ share prices have fallen since the merger was unveiled – just under $1 billion has come off their market capitalisations – which suggests that takeover speculation has drained from their prices as the prospect of a successful nil-premium merger has strengthened.

The merger’s logic has so far stood the test of the market’s scrutiny, despite initial rumblings relating to Oxiana’s founder, Owen Hegarty, decision to retire as an executive and hand custody of the enlarged group to Zinifex’s Andrew Michelmore.

Zinifex’s independent expert, Grant Samuel, broadly summed up the market’s response to the deal when it said in the scheme document that estimates of value in relation to the merger were subject to considerable uncertainty and that its conclusion that the offer was fair to Zinifex shareholders (the merger is being effected via an Oxiana bid for Zinifex) could change in different market conditions.

Oxiana’s value is highly-sensitive to copper in particular and, because of its project pipeline, to the outlook for commodity prices generally. Zinifex’s value is tied to zinc prices but it is less exposed to commodity markets simply because it has $1.2 billion of cash.

The differences, and the marriage of Zinifex’s cash with Oxiana’s prospects and development pipeline, are what made the merger compelling to the boards of both companies and led them to the decision that a 50:50 split of the merged group would be fair to both sets of shareholders.

Grant Samuel details the benefits of greater diversity of commodities and geographies, the greater scale and financial flexibility and the capacity the merged group would have to make bigger and riskier acquisitions and developments.

It also makes a telling point – the merger isn’t defensive. Individually both companies are too large to be targeted by the smaller resource groups and too small to make a difference to the industry majors. The new company will be larger – it will have a market capitalisation around the $11 billion mark – but will have an open register and would therefore be available to one of the industry consolidators.

It would be interesting to see what would happen if Xstrata, or some other major, did try to move ahead of the merger and gave Oxiana shareholders the choice of a premium or the nil-premium merger. The conventional wisdom is that shareholders will always take a premium over a merger of equals but Oxiana isn’t a conventional company and the merger has its own appeal.

Hegarty would clearly be influential in the outcome but the notion of merging with Zinifex, extracting some synergies, accelerating the development of Oxiana’s pipeline with Zinifex’s cash and using the larger balance sheet and (hopefully) better market rating to expand through further acquisitions would be a viable alternative to a cash offer.

The takeover premium wouldn’t be extinguished by the merger. Indeed, the latent premium could be enlarged if Michelmore integrates the companies effectively and expands aggressively.

Presumably the companies themselves hope that nothing occurs to disrupt the merger and the creation of the fifth-largest Australian resources company and a globally significant second-tier miner.