Glenstrata: Not just mining’s biggest ever deal, a new kind of resource giant

Glencore International is in talks with Xstrata to merge in a deal that would create a $80 billion rival to BHP Billiton, Vale, Rio Tinto and China’s Shenhua.

Commodities trader Glencore was founded in 1974 by Marc Rich, a fugitive businessman controversially pardoned by Bill Clinton shortly before leaving office in 2001. Xstrata was formed in 2002 after buying Glencore’s coal assets. Glencore already owns 34% of its Swiss neighbour.

Investment bank Credit Suisse in anticipation of a merger said last year combined, Xstrata and Glencore would have revenues of roughly $200 billion, profits of about $11 billion and mining would constitute 80% of the total. Glencore will control about 65% of a merged company, but only if it is a merger of equals as the companies maintain.

Should a deal be made it will the largest ever for the mining sector and shake-up the industry in the same way the BHP and Billiton tie-up did a decade ago.

The Financial Times says a merger would force Rio Tinto, BHP Billiton and Anglo-American to re-examine their owns strategies:

“It would be a unique business model. Glencore provides the marketing and Xstrata the operational base. It could be a new model for the industry although it would be difficult to replicate by others. This is quite a unique circumstance,” said one long-term industry observer. – FT

The Guardian argues that Xstrata needs to play hard to get and that Glencore is a “strange beast – part trader, part logistics operation, part miner – that may yet have mysteries to reveal:”

That leaves the financial terms. But they may prove harder to crack since there’s no such thing as a merger of equals, whatever the investment bankers and spinners say. Deals are always constructed as company A making an offer for company B. In this case Glencore would offer to buy Xstrata, and it’s nonsense to suppose ownership of the combined pie can be determined solely by yesterday’s share prices. The old principle remains sound: takeovers require a price premium to reflect loss of control. – Guardian

Bloomberg begs to differ, saying a transaction may bring savings of as much as $704 million:

“This may be the rare case where a nil-premium merger of equals in which shareholders of both companies share the synergies is possible, and maybe even sensible and likely,” Christopher LaFemina, an analyst at Jefferies Group Inc., said today in a note. “A deal like this would never be easy, but now is as good a time as any for it to happen.” – Bloomberg

FT’s Lex column does not buy the cost-saving argument saying a merged entity would be a new kind of resource giant:

Alternatively, investors may ignore the synergy arguments and decide that the two companies are entering new territory. It is not a BHP Billiton-Rio Tinto style deal nor an Xstrata-Anglo American one. Instead, combining Xstrata and Glencore creates the first mega vertically-integrated commodities business. BHP Billiton tried to do it from scratch, and gave up. If Glenstrata nails it, who knows? – FT

Reuters says Glencore’s Ivan Glasenberg and Xstrata’s “Big Mick” Davis who both cut their teeth in South Africa’s coal industry in the 1980s, are highly competitive (both are keen sportsmen, known for 70-hour workweeks and are ferocious dealmakers) and their close relationship have been tense in the past.

The new company will get the bulk of its revenue from mining, leaving Davis as the obvious choice for the top job, while others point out that Glasenberg, who has said he does not plan to sell shares, is unlikely to step aside.

This has left some skeptical about whether the two brash characters would be able to work together in a combined company. – Reuters

The Wall Street Journal says according to people familiar with the matter Big Mick will run the new entity:

But according to one of the people familiar with the matter, large investors—many of whom own stakes in both companies—were eager for Mr. Davis to play a ongoing role given his long experience successfully running a public company. Mr. Glasenberg, by contrast, has only run a public company since last May, when he staged an initial public offering for Glencore, previously a secretive partnership.

Most analysts believe that once a merger goes through, and that may take more than 8 months, a combined Glencore-Xstrata’s next move may an Anglo takeover:

If I were Cynthia Carroll, CEO of mighty Anglo American, one of the Big Four mining giants, I’d be more than a tad nervous right about now.

In 2009, Xstrata, the Anglo-Swiss mining company that owns Canada’s Falconbridge, offered Anglo a no-premium “merger of equals.” Ms. Carroll, who had spent much of her career at Montreal’s Alcan, politely told Xstrata boss Mick Davis to take a hike. He did, and concentrated on organic growth.

The next lunge at Anglo may not be so easily repelled. – Globe & Mail

The mega-merger may the first of many this year: Bloomberg quotes an analyst saying that “there’s really nothing technically that should be preventing large-scale M&A activity:”

“Balance sheets across the industry are in rather rude health and large miners have massive cash balances that seem to grow larger with each passing quarter.”

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