Glencore, Xstrata in merger talks

Commodities trader Glencore (glen-l) is looking to combine with Xstrata (xta-l) in a possible 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 reportedly gain control of Xstrata’s copper and zinc production.

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.”

Reuters reported Credit Sussies’ analysts estimate those synergies to be around US$468 million.

Xstrata confirmed earlier on Feb. 2 that it was approached by Glencore and is in discussions regarding a merger. It notes that the talks may not lead to an offer being made.

Under U.K. takeover laws, Glencore has 28 days or until March 1st to table a bid or walk away, however, that deadline could be extended.

The discussions may come with little surprise given their shared history and that Glencore’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, located about 3 km from Glencore’s headquarters in Baar, acquired the commodities trader’s Australian and South African coal assets for US$2.5 billion on listing on the London stock exchange in March 2002. Prior to its IPO, Glencore’s chief executive Ivan Glasenberg selected the miner’s current CEO Mick Davis to head up Xstrata, which became the world’s fourth-largest diversified miner.

The two 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.”

But what may become a point of contention, mainly for Xstrata shareholders, is the no premium attached to the ongoing merger talks, notes Largey.

“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.”

Bloomberg reported that the combined company may be valued at 56 billion pounds or US$89 million, after excluding Glencore’s 12.6 billion-pound stake in Xstrata. With that market cap, the merged firm would move ahead of China’s Shenhua Energy, currently the fourth-largest listed miner, though it still be way behind mining heavyweights BHP Billiton (bhp-n, blt-l), Vale (vale-n) and Rio Tinto (rio-n, rio-l).