Huge Mining Merger Imminent? Glencore and Xstrata Haggle Over a $37 Billion Deal
“A merger of equals.”
That’s how Glencore International (LSE: GLEN.L) CEO, Ivan Glasenberg, describes his company’s proposed buyout offer for Xstrata (LSE: XTA.L).
Not a “takeover”… a “merger of equals.”
Try telling that to Xstrata executives and shareholders, though.
With Glencore already owning one-third of Xstrata, they feel they’re getting shortchanged on the remaining two-thirds of the company.
And it’s creating a standoff between the two mining firms…
The $90 Billion Juggernaut in Rio Tinto’s Rearview Mirror
Glencore has offered 2.8 new shares for every Xstrata share that it doesn’t own, which values the deal at $37 billion.
But according to Reuters, several influential Xstrata shareholders won’t accept the deal at that price and want Glencore to raise its bid.
Glasenberg is standing firm, though, arguing that Glencore is already paying a premium “for the sake of getting the deal done” and one that’s “fair to all shareholders.”
He’s taking the show on the road, too. The company is about to pack up the truck and embark on a series of stock-rallying road shows in an attempt to sell the deal to shareholders of both companies before a vote takes place later this year.
If an agreement is reached, it would seal the largest mining sector merger since Rio Tinto (NYSE: RIO), shelled out $38 billion for Alcan in July 2007.
Speaking of which… it would also value Glencore-Xstrata at around $90 billion, putting it within spitting distance of Rio Tinto’s current $101 billion market cap. Between them, the two companies would control one-third of the world’s thermal coal trade, becoming the top exporter in the process, as well as the biggest zinc producer and the third-largest copper miner.
But there’s a fair way to go, given the issues between the companies…
In addition to feeling that Glencore undervalues their company, Xstrata shareholders have also expressed concerns that Glencore’s mining assets aren’t as strong as advertised.
But Glasenberg’s bargaining position got stronger after he announced this morning that Glencore’s profits climbed by 7% to $4 billion in 2011.
Spurring the growth was an 18% jump in operating profit at the company’s industrial segment – one that includes mines and oil wells.
Glencore also benefits from the failsafe combination of rising demand from emerging markets for its raw materials like copper and coal, coupled with rising commodity prices.
To compensate for their differences over the merger, though, Glencore and Xstrata have a common goal…
United in Iron Ore
Both companies want to break into an iron ore market currently dominated by Rio Tinto, BHP Billiton (NYSE: BHP) and Vale (NYSE: VALE), which boast a 60% market share between them.
That’s light years away from the 1% that Glencore and Xstrata control. In 2011, for example, Glencore traded just 10.3 million tons of the 1.1 billion ton iron ore market. So in this respect, it’s essential that it joins forces with Xstrata, so they can buy smaller iron ore companies, add their production, and sign contracts with iron ore buyers.
It’s not cheap, though. Reuters notes that a potential target is Australia’s Fortescue Metal Group, which churns out 55 million tons of iron ore per year. However, the price tag for the company would be almost $20 billion.
As Glasenberg notes, this might force Glencore into smaller, cheaper, yet thriving iron ore markets in Africa.
So to really have a chance of breaking through the iron ceiling, Glencore and Xstrata need each other. Regardless of whether you call the deal a “merger of equals,” a “takeover,” or a even a “match made in metal heaven.”
Best regards,
Martin Denholm
Related Topics: Commodities, Stocks
