Glencore and Xstrata agree to merger terms

February 7, 2012

In a deal that would create a huge mining company, Glencore International, the biggest commodities trading company in the world, agreed to buy the remaining stake in Xstrata that it does not already own for $41 billion. The deal would create a company with a market value of nearly $90 billion.

Glencore, which already owns 34 percent of Xstrata, will pay about $41 billion for the remaining stake, valuing the mining company at nearly $62 billion. The offer represents a 15 percent premium to Xstrata’s closing share price on Feb. 1.

There was early opposition from some shareholders, however, if the deal does go through it would create a commodities giant that combines Xstrata’s global mining operations with Glencore’s trading and marketing businesses in copper, nickel, coal and other commodities. The company would be renamed Glencore Xstrata, and would be the fourth-largest diversified miner in the world, with revenue of $209 billion and pretax profit of $16 billion, based on 2011 figures, Bloomberg reported.

“A merger between Glencore and Xstrata offers a unique opportunity to create a new business model in our industry to respond to a changing environment,” Xstrata’s chief executive, Mick Davis. “Increased scale and diversity will improve our risk profile, enhance access to capital markets and allow us to participate in industry consolidation.”

The new group would have mining assets from New Caledonia to the Democratic Republic of Congo, and is expected to use its combined clout to look at other deals, including a potential takeover of Anglo American according to analyst.

“M&A is a space that you’d expect the combined group to be in,” Xstrata chief executive Mick Davis, who will be CEO of the enlarged Glencore, told Reuters.

“We have a combined entity which has much greater flexibility to be opportunistic and capture the right opportunities when they are there.”

Glencore will issue 2.8 new shares for each Xstrata share in a deal they called a “merger of equals.”

Standard Life Investments, the fourth largest investor in Xstrata, said it intended to vote against the deal because it “clearly undervalues” the company’s assets and future earnings potential.

Standard Life holds 63.6 million shares in Xstrata.

Some Xstrata shareholders had demanded a strong sweetener over the past few days but several analysts still expected them to warm to the deal, even though the premium is well below the typical 20 percent to 30 percent level in the mining sector.

Both companies have benefited from increasing demand for commodities from emerging economies. Xstrata generated revenue of $33.9 billion and reported a pretax profit of $11.7 billion for the 12 months ended Dec. 31. Glencore posted revenue of $186 billion and a pretax profit of $6.5 billion in the same period.

The deal is expected to close by the third quarter of this year, and is backed by the boards of both companies. The merger must still pass regulatory muster in various regions, including the European Union, China and the United States.



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