Anglo-Swiss miner Xstrata dropped immediate plans for a $10 billion bid for platinum producer Lonmin today but set the scene for a later deal by scooping up Lonmin shares as they fell.
Xstrata, the world's fifth biggest mining group by market value, said financial turmoil and difficult debt terms were behind the decision, but it increased its stake in Lonmin to 24.9 per cent, making a rival bid very unlikely.
"Xstrata are not walking away, but have effectively locked out a competing bid at an attractive average-in price for their stake," analyst Michael Rawlinson of Liberum Capital said.
Xstrata, which already had a 10.7 per cent Lonmin stake, bought 22.2 million shares at an average of £19.79 each, well under its initial proposed offer of £33 per share unveiled on August 6th.
Xstrata built up its stake to the maximum allowed under UK takeover rules, which stipulate it cannot make a formal bid for Lonmin for six months unless it is agreed by the company.
After 12 months Xstrata is free to make a bid lower than the £33-per-share proposed bid.
Lonmin's shares, which had already shed a third since Xstrata made its approach tumbled as much as 30 per cent and were trading 16.6 per cent weaker at £18.96 by 12.37pm.
Xstrata shares, which had lost 46 per cent since it made the approach, surged 7.6 per cent to £18.46, compared to a 3.9 per cent increase in the UK mining index.
Xstrata said it passed up on making a formal bid due to the current chaos in financial markets.
"The current lack of clarity and certainty regarding the future availability of credit introduces significant risks into the financing package available to Xstrata," Chief Executive Mick Davis said in a statement.
Xstrata said loan terms required it to refinance a substantial portion of the debt within 12 months.
"Finalising the bank debt necessary to implement the offer on those terms would not be in the best interest of Xstrata. As a result, Xstrata has no current intention to make an offer for Lonmin."
Banking sources told Reuters last month that Xstrata had approached 22 banks to make commitments for a $15 billion loan to both fund the Lonmin takeover and refinance existing debt.
Lonmin, which had spurned the offer as too low, said it would continue to press on with a strategic review following Monday's replacement of Chief Executive Brad Mills, who had been criticised for the firm's underperformance.