-- Alexander Smith is a Reuters columnist. The opinions expressed are his own --
By Alexander Smith
LONDON, June 22 (Reuters) - Xstrata not only needs to persuade Anglo American's board and shareholders that a merger of the two miners makes sense, it must also convince new South African President Jacob Zuma of the deal's merits.
That could prove a tough sell. Xstrata's overlap with Anglo in South Africa -- particularly in coal where powering national electricity provider Eskom is a hugely political issue -- means the country will provide many of the synergies from any merger. It's unlikely these can be achieved without a significant impact on South African employees. And any job cuts will be a tough sell to South Africa's populist president, who was only installed last month.
Any deal between Xstrata and Anglo deserves close scrutiny from the government's perspective. Mining accounts for nearly 7 percent of South African GDP and employs half a million workers. With mining companies already cutting thousands of jobs due to lower prices, a merger of Xstrata and Anglo threatens to swell already high unemployment rates. Anglo employs about 110,000 workers in South Africa in platinum, coal, ferrous metals, diamonds and base metals, while Xstrata employs some 25,000 in its coal, ferrochrome, vanadium and platinum units.
Just a few years ago there would also have been an outcry in South Africa about any threat to the independence of Anglo. But the group's iconic status has waned somewhat recently, underscored by Anglo's decision to move its headquarters to London several years ago.
Assuming Xstrata manages to persuade Anglo's board to come to the negotiating table, Zuma's immediate options are limited.
Sure, South Africa's Public Investment Corporation (PIC) -- the public sector investor which owns just 5.5 percent of Anglo -- could vote against any proposal. But with no golden share or other means to frustrate a deal, the ruling ANC government stands little chance of blocking any proposals this way.
Its only other route -- without resorting to extraordinary measures such as revoking mining licences -- is via the competition process. An Xstrata/Anglo combination will be closely watched as a test of whether South Africa's proudly independent competition authorities can continue to operate at arm's length under Zuma.
This makes the way that any Xstrata/Anglo deal is treated an important litmus test for Zuma's approach to takeovers -- particularly those involving foreign investors. And it makes it all the more important that Xstrata's CEO Mick Davis -- himself a South African -- goes out of his way to explain the proposed deal to concerned South African stakeholders.
Hard though it may be, Zuma will need to resist the temptation to interfere in the process. The eyes of the world's investment community will be watching his every move.
-- At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, Reuters' customers can click on --
(Editing by David Evans)