Lonmin rejects Xstrata takeover

Troubled platinum producer Lonmin plc said Friday it will sell $817 million of new shares at a 44% discount to its current share price as it emerged that it had rejected a takeover offer from its largest shareholder, Xstrata plc.

Xstrata had proposed to sell its South African platinum, chrome and vanadium operations to Lonmin in exchange for Lonmin stock that would have boosted its existing 24.5% stake to about 70%, according to Lonmin. Xstrata's offer was contingent on Lonmin launching a $1 billion rights issue, which Xstrata would have underwritten, and on Lonmin allowing its new owner to appoint the chairman, chief executive and chief financial officer.

Lonmin rejected the offer because it did not include a sufficient takeover premium and because of concerns that the deal would have left Lonmin in breach of its loan terms and exposed to creditors, the target said.

"The board of Lonmin had made it clear that it would be prepared to consider any revised proposal that Xstrata wished to make on its merits; however, no revised proposal was made," Lonmin said.

Although it didn't make a second takeover offer, Xstrata on Thursday lodged a new proposal to support Lonmin's planned rights issue on the condition that it got to replace Lonmin's top executives. Lonmin rejected that plan, too.

Lonmin, the world's No. 3 platinum producer, has been damaged by strikes at its Marikana mine in South Africa that began on Aug. 10 and escalated in the following days when 44 people were killed in a series of clashes between striking miners, South African police officers and Lonmin security guards. The strikes ended after Lonmin agreed to pay raises of between 11% and 22% for its workers.

Lonmin said Friday that it had an operating loss of $702 million over the year to Sept. 30, compared with operating profit of $307 million a year earlier. Underlying profit before tax was $77 million for the current year, down from $311 million a year earlier.

Xstrata's bid for Lonmin came as a surprise to some analysts, not least because the Zug, Switzerland-based mining company is seeking to secure its own £22 billion ($35.5 billion) takeover by its largest shareholder, Glencore International plc.

"Xstrata have been talking about shifting the stake [in Lonmin] for sometime, and it is no secret about Glencore's dislike for the sector," Liberum Capital Ltd. London-based analyst Ben Davis noted Friday. He also criticized Lonmin's decision to push ahead with the rights issue, which he described as a "short-term balance sheet fix to what is essentially a broken business model."

Xstrata defended its bid for Lonmin as a move to protect the value of its existing stake rather than an attempt to gain control.

"Lonmin has suffered long-standing operational problems and we are concerned that the business does not have the management capabilities to ensure a sustainable future, even if short-term funding issues are resolved," an Xstrata representative said.

Xstrata said it was disappointed that Lonmin rejected its proposals and that it remained open to "all constructive solutions to strengthen Lonmin's management and operational capabilities."

Xstrata bought its 24.5% stake in Lonmin in 2008, when it launched a failed £5.6 billion bid. Xstrata bought the holding at an average of nearly 2,000 pence per share.

Lonmin shares traded Friday early afternoon at 446.8 pence, almost 78% below Xstrata's average acquisition price.

Lonmin said Friday that it would sell shares in its rights issue at 140 pence per share, a 69% discount to its Thursday closing price and a 44.4% discount to the theoretical ex-rights price of an existing share. Lonmin said it will issue nine new shares for every five existing shares.

Citigroup Inc., HSBC Holdings plc, JPMorgan Cazenove Ltd., Standard Bank of South Africa Ltd., BNP Paribas SA, Investec plc, Rand Merchant Bank and Standard Chartered plc are underwriting the share sale.

Lonmin is taking financial advice on the sale from Greenhill & Co.'s David Wyles, Anthony Parsons and Edward Rowe.