Anglo shares jump on merger talk

Xstrata is keen on the tie-up

Shares in mining group Anglo-American rose by almost 10% on Monday after it was approached by Swiss-based rival Xstrata about a possible merger.

Xstrata had said a union "of equals" between "these two world-class companies" was "highly compelling".

Anglo confirmed the approach but said nothing had been agreed.

Xstrata's shares were down by 4%, or 27.50p, at 653.50 pence. Meanwhile Anglo's shares slipped back from highs but were still 6% ahead at 1721 pence.

'Run for their money'

Industry observers suggest a merger would make sense because of the vast cost savings that could be made.

This would help compete against the Rio Tinto and BHP Billiton, who have agreed a joint venture.

We think a merger is much more likely than ever before Kieran Daly, analyst at Investec Securities Check Anglo-American's shares Check Xstrata's shares

That deal was struck after Rio scrapped a planned tie-up with Chinalco, a state-controlled Chinese company.

Consolidation within the mining industry had "just ramped up a notch" following Xstrata's approach, said Manoj Ladwa, senior trader at ETX Capital in London.

Anglo and Xstrata both have coal mines and infrastructure in Australia and South Africa, while analysts say there was also potential for saving money in their copper mining operations.

Cost synergies of such a deal were likely to be about $700m (£426m) per year, added Mr Ladwa, saying "the creation of a mining powerhouse will give Rio Tinto and Billiton a run for their money".

The combined firm would be worth about £41bn based on their stock market value on Friday.

'Respond positively'

Mining firms have been hit by falling demand for metals amid the downturn.

Mining firms have been hit by falling demand for metals

They have also had problems raising cash because of the credit crunch, which last year led Xstrata to abandon its £5bn bid for its rival Lonmin.

And Anglo-American is cutting 19,000 jobs this year after a 29% fall in 2008 net earnings because of sliding demand for raw materials.

"A potential merger is at a very preliminary stage but we think Anglo's beleaguered management-board will respond positively and engage with Xstrata," said Kieran Daly, an analyst at Investec Securities, in a note to investors.

"We think a merger is much more likely than ever before."