Xstrata’s proposed £40 billion merger with Anglo American has effectively collapsed after Anglo’s shareholders rejected the approach.

All of Anglo’s leading institutional investors are understood to have turned down Xstrata’s nil-premium merger of equals.

Those shareholders that have expressed an opinion on pricing have told The Times that they want a premium of between 30 per cent and 50 per cent to complete the deal.

If Xstrata can find the money for a premium, shareholders are likely to force Anglo’s management into talks. However, that would require Xstrata to find up to £10 billion and analysts are sceptical that the Anglo-Swiss miner can raise that amount of money.

“It is hard to see how they could get the money for a premium, so the deal must be as good as dead,” one analyst said.

Xstrata’s net debt stands at about £7.5 billion, against a market capitalisation of £17.2 billion. It has already raised $4.1 billion in a rights issue this year, which could restrict its future capital-raising potential.

Xstrata is a respected dealmaker after pulling off a number of large acquisitions since it floated in 2002, but credit markets remain tight and the City has seen other miners run into difficulty after overburdening themselves with debt.

Commodity markets are also in flux because of continued economic uncertainty, making large loans riskier than during the boom years.

Xstrata could offer Anglo a share premium, but that would mean that its own shareholders would lose out as the value of their holding was reduced. This is not seen as a viable option.

Xstrata wrote to Anglo’s board two weeks ago to propose a merger that would have created one of the world’s largest diversified mining groups. The Anglo-Swiss miner estimated that a tie-up between the two companies could generate savings of about $1 billion a year.

Mick Davis, Xstrata’s chief executive, said that the merger should be between equals. Anglo’s management rejected this approach, claiming that its assets were of higher value.

Mr Davis made a direct pitch to shareholders to encourage them to push Anglo’s management into talks, but it appears that this has not happened.

Investors representing nearly 50 per cent of Anglo’s stock are understood to have rejected the Xstrata proposal, effectively killing it in its present state.

However, concerns remain about Anglo’s management and investors have not ruled out a deal with Xstrata.

Mr Davis is well respected and many investors would like to see him running a combined Anglo-Xstrata, but only if Xstrata were to pay a premium.

Another analyst said: “Anglo’s shareholders feel that the company is sitting on higher-quality assets and a premium should be paid for that.

“They will be pushing for a premium but Xstrata would have to give up a lot to get there and it probably isn’t possible in current market conditions.”

Both Anglo and Xstrata declined to comment. Xstrata’s share price fell 22.9p to £5.87 yesterday while Anglo was off 64p at £15.63p.

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