Xstrata and Glencore unveil 57billion mega-merger deal

Mining firm Xstrata today unveiled the terms of its mega-merger with commodity trading giant Glencore.

The deal will create a 57billion powerhouse rival to the world’s mining
heavyweights – the
fourth biggest mining group in
the world behind BHP Billiton,
Rio Tinto and Brazil’s Vale.

The announcement came as Xstrata revealed a 20% increase in profits for 2011, to $5.9bn (3.8bn).

The valuation of Xstrata translates to a share price of 1,290p – compared
with the 1,100p at which shares were trading before news of the deal emerged
last week.

Merger of equals: Xstrata chairman Sir John Bond will take the same role at the enlarged company

'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. It is the logical next
step for two complementary businesses,' said Xstrata chief executive
Mick Davis, who will be CEO of the enlarged Glencore.

Glencore CEO Ivan Glasenberg, a billionaire who owns 15.8 percent of Glencore will be president and deputy CEO of the new company.

Xstrata shareholders other than Glencore, which already has a 34 per cent stake in the mining group, will hold 45 per cent of the new company, to be named Glencore Xstrata International.

Some Xstrata shareholders have demanded a strong sweetener over the past few days and they will need to be convinced that growth prospects and synergies outweigh a minimal premium compared with takeover premiums averaging 20 percent to 30 percent in the mining sector.

Fund managers who own shares in both the groups are expected to show more support for a modest premium deal than those who hold Xstrata shares only, analysts have said.

It is hoped that the appointment
of Bond, who as a former
chairman of HSBC and more
recently Vodafone has wide international
experience and is wellknown
among big institutional
shareholders, will ease concerns
about the governance of the new
company.

Credit rating agency Moody’s
said a shared future would vastly
improve the two firms’ ability to
secure new lending.

In a bullish note on the merger,
Moody’s said Glencore could slash
costs and reduce its reliance on
third-party firms by feeding
Xstrata’s minerals into its globespanning
network of traders.

Moody’s said Xstrata would
benefit from Glencore’s 6.6bn
liquidity pool and could also tap
the invaluable market intelligence
of its prospective partner’s
traders to sell its commodities
more profitably.

The agency said Xstrata would find it far
easier to raise new equity without
the looming presence of
Glencore as a 34pc shareholder
putting off other investors.

Both companies’ CDS spreads,
which measure the likelihood of
debt default, have tightened significantly
since news of a possible
deal leaked out.

Several analysts said European
and Chinese regulators were
unlikely to block a deal on competition
grounds.

View from the City

'Earth-shattering is unlikely to be a popular metaphor among the mining community. But it captures well the scale, and boldness of this merger,' said Ranvir Singh of the market analyst RANsquawk.

'Five years in the making, the tie-up of two obviously complementary businesses will create a formidable player in an industry which has seen widespread consolidation in the last decade.

'Xstrata’s results showed earnings above expectations, and a 20 per cent increase in profits in 2011. But despite such buoyant numbers, its board still sees an uncertain global outlook.

'While the company believes Chinese demand will continue to drive consumption, it sees the ongoing European debt crisis as a serious threat to growth.'

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Xstrata and Glencore unveil 57billion mega-merger deal