Glencore and Xstrata Merger: Game Changer?

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Case Details:

Case Code : FINC080
Case Length : 27 pages
Period : 2009-2011
Pub. Date : 2012
Teaching Note : Not Available
Organization : Glencore International AG and Xstrata Plc.
Industry : Metal and mining industry
Countries : Switzerland, US and Global

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"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. Increased scale and diversity will improve our risk profile, enhance access to capital markets, and allow us to participate in industry consolidation." 1

-Mick Davis2, Chief Executive Officer, Xstrata, February 2012.

"A merger between commodities trading giant Glencore and mining group Xstrata would increase price competitiveness and transparency in the resources space, following reports that the two companies were in merger talks. I [Jonathan Barratt] think it's a very good thing, if we can get a player that has just as much muscle as Rio and BHP then we are going to see a lot more price competitiveness in the market place." 3

-Jonathan Barratt, Chief Executive Officer, Barratt's Bulletin4 , February 2012.

On February 7, 2012, Glencore International Plc (Glencore), the world's largest diversified physical commodities trader, announced its merger with mining company Xstrata Plc (Xstrata) under an all stock deal. As part of the merger deal, Glencore offered 2.8 of its shares in exchange for each share of Xstrata Plc. The share exchange ratio indicated approximately a 15.2% premium over the closing price of Xstrata Plc’s shares on February 1, 2012. The merger was expected to result in an entity with market capitalization of US$ 90 billion and to make Glencore into a ‘powerhouse” in the mining industry and the world's fourth5 largest diversified miner.

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Glencore said the merger was not expected to "result in any negative impact on competition in the commodity markets in which the two companies operate. In fact, the merged firm was expected to be able to offer customers a wider range of products and services and provide improved security of supply to satisfy customer demand."6

However, some minority shareholders of Xstrata were not satisfied with the valuations. Standard Life, which held nearly 2% of Xstrata’s stock, making it the fifth-largest shareholder in the company, was of the opinion that the deal was not attractive to Xstrata. It said "although we see some merit in the merger of Xstrata and Glencore, the proposed exchange ratio clearly undervalues Xstrata’s assets and future earnings contribution." 7

According to some industry sources, "[b]oth Glencore and Xstrata have already considered a string of projects and companies -- buoyed by iron ore prices still robust at three or four times the cost of mining -- but no major deal has yet made the grade."8 The new entity is expected to be the world leader in the coal, zinc, and copper segments, but may not produce enough iron ore to hold the leading position in the iron ore segment. Glencore, which started trading in iron core in 2008, sold 10.3 million tonnes of iron ore in the financial year 2011, when the global iron market stood at 1.1 billion tonnes. The iron ore segment contributed profit margins of 40-70% to diversified miners in the year 2011.

Background Note - Next Page>>

1] Mark Scott, "Glencore and Xstrata Strike Mining Merger, but Some Balk," www., February 7, 2012.
2] Mick Davis is a South African; he was hired by Glasenberg in 2001. He is nicknamed "Big Mick" and also have fond cricket.
3] Ansuya Harjani, "Glencore-Xstrata Merger to Increase Competition: Expert,", February 3, 2012.
4] Barratt's Bulletin is based in Australia and it is known as weekly bulletin. It provided information on commodities, major currencies, and various indices.
5] "Glencore, Xstrata to Submit Merger Plan to EU,", February 24, 2012.
6] Alex Macdonald, "Glencore, Xstrata Merger Put to Brussels," www., February 24, 2012.
7] Foreign Staff, "Glencore-Xstrata Merger a 'Poor Deal for Minorities’,", February 8, 2012.
8] Clara Ferreira-Marques and Jacqueline Cowhig, "Glenstrata Faces Uphill Struggle to Build Iron Ore Clout,", March 5, 2012.

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