Glencore, Xstrata agree to merger

Wednesday, February 08, 2012

LONDON, England — ANGLO-SWISS mining group Xstrata PLC announced plans yesterday to merge with commodities trading giant Glencore International PLC in a deal that will create the world's fourth largest natural resources group.

The combined company, to be called Glencore Xstrata with a combined market value of US$90 billion ($7.7 trillion), will control a chain of businesses from mining to refining, storage and shipping of basic commodities like coal, copper and corn.

The new group would be the world's largest producer of thermal coal — which is used to fire power stations — as well as becoming major a force in the mining and production of copper, used in electronic cables, and other metals including ferrochrome, a key ingredient in the production of stainless steel.

The announcement of the terms of the deal comes just a few days after the first public acknowledegment that the two companies were in talks about a long-mooted tie-up — merger talks, codenamed "Everest", have gone on for years.

Xstrata, based in Zug, Switzerland, was formed in 2002 when it bought Glencore's coal assets. The company mines copper in the Americas, zinc in Spain and ferrochrome and vanadium in Australia and South Africa.

Glencore extracts, ships and refines raw materials from coal to corn. It is based in the Swiss town of Baar but has its main listing in London.

Glencore was founded in 1974 by Marc Rich, the trader who was controversially pardoned on tax evasion charges in 2001 by US President Bill Clinton just hours before he left office. Rich sold the company to its employees in 1994, and the company has been at pains to distance itself from its founder. Environmental groups, however, have since targeted the company for its mining interests.

However, even though the deal is likely to win the day — Glencore already owns 34 per cent of Xstrata — leading shareholders were already beginning to criticise the terms of the all-share deal.

Under the terms of the merger agreement, Xstrata shareholders would receive 2.8 Glencore shares for each of their shares. That represents a premium of 15.2 per cent based on Monday's closing prices.

The merger is projected to yield cost savings of US$500 million in the first full year, primarily in marketing, while creating the world's fourth largest global diversified natural resource company, with operations in 33 countries. It will also give the combined company greater leverage to borrow money for its operations — a key advantage in the high-volume, low-margin commodities business.