Glencore, Xstrata to create megaminer

Commodities trader Glencore International  (GLEN-L) is looking to combine with Xstrata (XTA-L) in an all-share merger of equals, which will see the combined entity dominate the global markets for thermal coal, zinc, lead and ferrochrome, and become a significant copper producer. 

Glencore currently owns 34% of Xstrata, and markets the miner’s coal, nickel and ferrochrome, and with the potential business combination it could gain control of Xstrata’s copper and zinc output.

Commenting on the strategy behind the offer, Macquarie’s London-based mining analyst Jeff Largey told The Northern Miner that Glencore may have “reached a point of saturation in terms of their market share,” making it harder to grow their business. 

“Their view is that by moving upstream in controlling the actual industrial or mining assets that produce the commodities they trade, that they will be in a position to further capture synergies by marketing these materials, enhancing margins, having greater control over the commodities themselves, and to drive additional revenues . . .  It’s really about trying to leverage what they do best, which is trading and marketing by controlling the actual physical commodities.”

Glencore is offering 2.8 of a share for every Xstrata shares held, representing a 15.2% premium to Xstrata’s shares on Feb. 1, a day before the news was leaked to Bloomberg.

Xstrata’s existing non-Glencore shareholders would thus own 45% of the merged entity, which would have a total market capitalization of about US$90 billion.

Reuters reported that Credit Suisse’s analysts estimate merger synergies to be US$468 million.

Glencore’s move may not surprise many, given its shared history with Xstrata. The trader’s US$10-billion initial public offering (IPO) last May was seen as a precursor to a possible tie-up between the two Swiss-based firms.

Xstrata’s head office, located about 3 km from Glencore’s headquarters in Baar, acquired the trader’s Australian and South African coal assets for US$2.5 billion upon its own listing on the London Stock Exchange in March 2002. Prior to Xstrata’s IPO, Glencore’s chief executive Ivan Glasenberg selected the miner’s current CEO Mick Davis to head up Xstrata, which  swiftly became one of the world’s largest miners through a string of acquistions, including Canada’s Falconbridge in August 2006. 

The firms are already seen by some regulators as a single entity when assessing competition in the commodities markets, the Financial Times reported, adding the proposed combination could “attract antitrust scrutiny worldwide” and “delay the completion of the merger,” but noted “insiders do not expect that competition issues would be an obstacle to the deal.”

Macquarie’s Largey added that Xstrata shareholders “generally would expect some sort of premium because the view they would have is in terms of a mining company [when] we’re looking at Xstrata’s assets; theirs is a superior set of assets and a superior growth profile, particularly in hard to come by metals like copper. So, in exchange for giving up control of this business they would like to be compensated for that.”

With a US$90-billion market cap, the merged firm would move ahead of China’s Shenhua Energy, currently the fourth-largest listed miner, though it’ll still be far behind mining titans BHP Billiton (BHP-N, BLT-L), Vale (VALE-N) and Rio Tinto (RIO-N, RIO-L).

In the new company, Davis would be CEO and Glasenburg, his deputy CEO and president. Xstrata’s CFO Trevor Reid and chairman John Bond would be CFO and non-executive chairman, respectively.