Glencore Merger With Xstrata Set to Rattle the Order of Miners

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Commodities, M&A Activity

European commodities trader Glencore looks like it may be set to merge later this year with its largest investment, the mining giant Xstrata in a deal that would forge a listed company worth an estimated £55bn (US$84.5bn) a Reuters article reported this week. Details of the logic behind the deal are few and far between at the moment as both parties have appointed banking advisers to work out the details so it’s far too early for a prospectus. But one group that would immediately benefit is the management of Glencore for whom a reverse takeover of this kind would give them a stock market listing and a chance to realize their valuable ownership in the company. Glencore is nominally valued at about £21.9bn (US$33bn) the placing of a £1.4bn (US$2bn) convertible bond last December and Xstrata was valued at £33.4bn (US$51bn) on Friday’s close in London.

When Xstrata’s long running merger with Anglo American failed to happen, a merger with Glencore became more of a realistic option. Glencore’s chief executive Ivan Glasenberg is said to be very positive about the deal and has accepted that Xstrata’s chief executive Mick Davis, would retain control of the £55bn business. The company’s chairman, Willy Strothotte, is also chairman of Xstrata so the two firms hardly needed any formal introductions.

Glencore was formed in 1974 by the trader Marc Rich who subsequently became a tax fugitive in Switzerland but was pardoned by Bill Clinton in 2001. Mr Rich sold his stake to management but the company has continued to grow such that now it employs some 50,000 people and had a turnover last year of US$106bn, although this was down 30% from the year before due to the financial crisis. Even so the firm made nearly $3bn of net income but has been looking for new sources of finance to pursue expansion hence the bond issue.

What could a combined trader miner like Xstrata/Glencore achieve that either company on its could not? It’s an intriguing thought. Glencore certainly has a hugely entrepreneurial and financially skilled management team that will probably see and be able to execute deals that miners have traditionally not considered. To what extent the two cultures will get along will remain to be seen if they merge. Even though Xstrata is the larger company, they seem to be at pains to ensure they are not dominated by Glencore setting limits at the outset on how much of the merged entity Glencore can hold and who the top management would be according to a Telegraph article. May be they should ask Rusal and Sual with whom Glencore formed a partnership back in 2006 by merging their respective aluminum and alumina activities. Glencore is widely credited with saving Rusal’s bacon when the credit crunch hit and the heavily indebted giant could not find a home for its aluminum production.   If I were an Xstrata competitor such as Anglo American, I would be watching this development with some trepidation.

–Stuart Burns

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