Glasenberg mining for ‘a big opportunity’

February 2, 2012


When news broke this morning that Glencore was in talks with Xstrata to complete an all share merger of equals, its chief executive, Ivan Glasenberg, was preparing to participate in a roundtable in Moscow on metals and mining.

In his opening remarks, the chief executive of the commodities trading giant said that firms in the sector, including Xstrata, went in to the financial crisis with debt-laden balance sheets, missing what he described as a “big opportunity” to acquire assets as a result. This morning, it emerged that Glencore was looking to take its own big opportunity.

While Xstrata stressed in its statement to the stock exchange that there is no guarantee Glencore will make an offer or an agreement will be reached, many in the market consider it to be a formality.

Bankers and analysts have long poured over the strategic rationale for a potential tie-up, with both Glasenberg and Mick Davis, chief executive at Xstrata, previously broaching the subject of a takeover publicly. Speaking this afternoon, Glasenberg said: “‘We always had a belief that these two companies should be together.”

From an industrial perspective, Xstrata would give Glencore coal and alloys production, and expand its existing industrial metals portfolio in copper, nickel and zinc. From a marketing perspective, Glencore would secure synergies and in some instances the potential to improve terms. A renegotiation of the terms between Glencore and Xstrata Coal so they are on par with industry peers could potentially add $120m to Glencore’s annual earnings alone, according to Mark Kelly at Olivetree Securities.

Some analysts have even gone further, suggesting a Glencore-Xstrata merger could spark a wave of consolidation, with the newly merged entity going on to bid for Anglo American

Chris Searle, corporate finance partner at BDO, said: “Whether this merger triggers another round of consolidation in the industry remains to be seen, given anti-trust concerns around the world, but other companies may feel forced to merge just to keep up with this new giant.”

As a result, analysts this morning were less focused on the merits of the deal, as they might be in another M&A situation. Instead, there were asking two questions: Why now? And what might the premium be?

First, Xstrata’s share price has performed strongly in the past few months, reversing an early outperformance by Glencore post-IPO.

One analyst said: “If you look at the relative share price performance, Xstrata has outperformed by 30% in recent months. Glencore wants to do this deal, and Xstrata has been well aware of that for some time. They seem to have decided that now is the time to get on with it, before the metrics start slipping out of reach.”

At 13.20 GMT, Glencore’s market cap was $31.8bn, while Xstrata was $36.7bn.

Second, the question of the premium. Xstrata’s share price has risen 10% and 15% in early trading, while Glencore’s has trended up around 5% as investors bet on the necessity for a premium to guarantee support from Xstrata’s minority shareholders.

Olivetree’s Kelly said: “There remains the possibility that Xstrata shareholders receive a premium to compensate for a dilution of control, offering an exchange ratio equal to the “best-ever” ratio would see an 11% premium to last night’s closing prices.”

Matt Turner in Moscow