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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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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Excerpts

Industry

Both Glencore and Xstrata attained a leading position in the highly volatile metal and mining industry, where companies endeavored to reduce volume risk through the acquisition of other mining/minerals companies. When prices collapsed in the industry, companies consolidated their positions through mega merger deals. After analyzing the global slowdown scenario, industry experts said that as fears of a global financial and economic meltdown receded, megamergers among the top 10 players - possibly even a renewed effort by BHP to acquire Rio Tinto - were more likely. The major risks companies in the metal and mining industry faced were political risk, price risk, and currency risk. Some mineral-rich countries such as Tanzania decided to impose a supertax on mining companies and declared mining resources as national property...

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

Glencore and Xstrata: Likely Position after Merger

Both the companies had attempted to merge several times but had failed. However, they finally decided to merge in 2007, with both of them agreeing to the terms of valuation, but the deal was once again abandoned due to some problem. The unsuccessful attempt had an adverse affect on the companies’ relations, with both clashing over issues several times. In 2008, Glasenberg blocked Vale's attempt to acquire Xstrata...

The Synergies

Industry analysts, market-observers, and economists anticipated that the merger would generate tremendous synergies. In a report to investors, Moody's Investors Service said, "A merger would create a "mining and trading powerhouse" that would be credit-positive for both companies, particularly Glencore. Xstrata currently has less debt and is more cash-generative than Glencore because mining is a higher-margin business than trading."...

Road Ahead

After completion of the merger, the combined firm would consolidate its position in the mining industry. It would likely to expand its portfolio in the iron-ore segment, a highly profitable business. Further, the combined company could attempt to acquire other iron ore producing companies, due to becoming stronger financially after the merger and could raise a debt to make further acquisitions. Vale, BHP Billiton, and Rio Tinto were known as the “big three” companies in the iron ore segment, capturing approximately 70% market of the global seaborne iron ore trade...

Exhibits

Exhibit I: Glencore's Consolidated Income Statement
Exhibit II: Glencore's Consolidated Balance Sheet
Exhibit III: Xstrata Plc's Consolidated Income Statement
Exhibit IV: Xstrata Plc's Consolidated Balance Sheet
Exhibit V: Financial Summary of Major Players in Metals and Mining Industry
Exhibit VI: Metals and Minerals Industry: Market Capitalization of Top 10 Companies as on March 6, 2012
Exhibit VII: Anglo American plc's Consolidated Income Statement
Exhibit VIII: Anglo American plc's Consolidated Balance Sheet
Exhibit IX: Expected Total Productions of Metals and Mineral after Merger
Exhibit X: Weekly Closing Prices of FTSE 100, Glencore Plc, Xstrata Plc and Anglo American Plc from May 19, 2011 to May 3, 2012
Exhibit XI: Iron Ore- Monthly Prices from December 2007 to February 2012


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