The picturesque, lakeside Swiss town of Zug, population 25,000, is an unlikely place for the humbling of a giant. But next week it's where Mick Davis, god of the mining takeover, will complete his most desperate act (or not).
Mr. Davis hopes that investors at the Zug meeting will give his company approval to sell about $5.6-billion (U.S.) in new shares to keep the wolf from the door. Xstrata has more than $16-billion in long-term debt, the legacy of a ceaseless buying spree during the commodities boom.
His shareholders, to say the least, are unhappy at being forced to stump up more cash or be diluted into oblivion by 1.9 billion (yes, billion) new shares. Reports out of London say a few large British investors are furious at perceived funny business between the company and its largest shareholder, Glencore International. But in the end, what can they do but say yes? Xstrata's debt is now rated only two notches above junk by Standard & Poor's and there's no end in sight to the slide in metal prices. Might be better to raise the money now than face a bigger crisis later.
One other footnote to the Xstrata tale of woe: After an 84-per-cent freefall in the past year, the company's stock market value is at least $9-billion (Canadian) less than the amount it paid, in cash, for Falconbridge in 2006. You remember that little fracas, don't you? The one where Inco tried to buy its Sudbury rival with stock, but got blown away by Mr. Davis's bazooka-sized chequebook? Xstrata won the deal and public relations war with a simple message: Cash is king.
Yes, it certainly is, and Xstrata doesn't have it. Falconbridge's former shareholders are laughing. Maybe not quite as loudly as Alcan's former shareholders are, though. They wrung nearly $40-billion out of Rio Tinto in the summer of 2007, even as some big U.S. investment banks were starting to come apart. That deal was for all cash, too. Rio's offer was $101 (U.S.) a share. (For fun, anyone want to speculate on what Alcan's share price would be today had it stayed independent? My guess is about $25.)
So now Rio Tinto has climbed into bed with the Chinese, not because it wanted to but because it needed a cash infusion to pay back its Alcan debt. And even though its China deal seems to have avoided a cash crunch, Rio's still down 75 per cent from the peak, and CEO Tom Albanese's neck could be on the line if things get much worse.
Those with long memories will recall something else that happened on the July day that Alcan was swallowed up. Jim Flaherty, the Finance Minister, announced the creation of an expert panel to look at Canada's takeover rules amid a hue and cry about the "hollowing out" of Corporate Canada. It wasn't just Alcan and Falconbridge that had been bought up by foreigners, but Inco, Fairmont Hotels, Masonite International, Dofasco, CP Ships, Ipsco, Intrawest and others. Did Canadians lack the spine to protect their own companies from the fearsome foreigners? Were we patsies? That's what Mel Hurtig said. But maybe it's just that we know a good price when we see one.
Either way, look how it has worked out. Intrawest and Masonite have both operated on the knife-edge of serious financial trouble; the latter had to get a reprieve from creditors last year to avoid a forced restructuring. Inco's buyer, Vale of Brazil, is in better shape than Rio or Xstrata but it, too, has been pummelled. Ipsco, another top-of-the-market takeover, was carved up by three other steel companies. Most of the Canadian assets went to Evraz, a Russian steel maker. Its stock is down 89 per cent in a year. It simply has way too much debt.
And what were Canadian companies doing while the Great Corporate Sellathon was happening? Most were sitting on their balance sheets or paying down debt. But look at them now in a depressed market. Agrium's making a $3.6-billion play for a U.S. competitor. If anyone's going to pick up distressed auto-parts companies, it will be Magna International, because it has little debt. Canadian National Railway may well be a consolidator in railways. Canada has a few of its own acquisition-crazy basket cases - hello, Teck Cominco - but only a few.
Maybe, if the economy gets even worse and he gets stuck for cash, Mr. Davis will end up selling some of his mines. If so, please don't forget about us, sir. Canadian investors would be happy to buy them back - at half of what you paid, of course. Who's the smart one now?