Yesterday’s announcement that Xstrata and Glencore were indeed talking to each other about a possible “merger of equals” has hit the fan, and stirred up a storm of comment around the world.
Everybody who’s anybody in world media has been saying today that this is the worst kept mining M&A secret of recent times, and they all have their own angle on it.
The name “Glenstrata” has been coined by someone (I know not by whom, but I offer my congratulations) as a name for the potential merged company.
The UK’s Telegraph suggests that far from being a merger of equals, a deal between Xstrata and Glencore could cost the latter as much as £25 billion (not too far short of $40 billion).
Glencore already holds 34 percent of Xstrata shares, but in terms of current market capitalization, it is the slightly smaller of the two. Many industry observers feel that Glencore will have to offer a premium to tempt Xstrata shareholders to back the deal, but estimates vary from “skinny” to “hefty”.
There is also a suggestion that Glencore’s $10 billion IPO last May was influenced by Xstrata’s reluctance to enter merger negotiations until Glencore had a comparable share price valuation.
The Financial Times suddenly declared yesterday that it knew all about the “engagement” between Xstrata and Glencore before the IPO, but no-one had been excited about the potential marriage. News about a mega-merger, the FT said, normally inspires speculation about who’s going to be next, but in this case, “the practicalities of bringing together the world’s biggest commodities trader with the fourth biggest diversified miner are expected to stymie any further deal making.”
News of the possible merger has not gone down well in Australia, however. In The Australian, John Durie comments that “when Glencore's Ivan Glasenberg does a deal with you, you can be certain about two things: he will stick to it and it will be a bad deal for you.
“Mick Davis has done an extraordinary job in building Xstrata to a $50 billion company since leaving Billiton when it merged with BHP in 2001,” says Durie, but he also alludes to a potential element of scheming in Xstrata’s announcement of the talks yesterday.
Under UK takeover rules, after an announcement like this has been made public, the potential acquirer has to follow through or withdraw its bid within a month. Under this “put up or shut up” rule, Glencore now has until 5pm on 1 March 2012 to announce its intentions – one way or the other. Has Davis made a premature announcement to “stymie” Glencore’s long term plans?
Xstrata is due to announce its annual results on Tuesday next week, and that might precipitate a rapid agreement – or not.
Other issues remain, such as who would lead a merged company; Davis of Xstrata or Glencore’s Glasenberg.
Durie suggests that the acrimonious personal relationship between the two would mean that a merger would be “a disaster waiting to happen,” from a governance point of view.
They do have history. With a 34 percent holding of Xstrata shares, Glencore holds veto power over Xstrata deals, and Glasenberg rejected the proposed 2008 merger between Xstrata and Brazilian giant Vale.
A combination of the two companies now would create the world's fourth-biggest miner, and the biggest vertically integrated commodities house. It would also be the world's biggest producer of thermal coal, zinc and lead.
Will it happen? Who knows?
