BL: Glencore Said to Be Considering Merger With Xstrata (Update1)
By Brett Foley and Jacqueline Simmons
May 3 (Bloomberg) -- Glencore International AG, the world’s largest commodity trader, is studying a merger with Xstrata Plc as a way to restructure its ownership and improve access to capital, according to two people familiar with the matter.
Glencore, which already owns 34 percent of Xstrata, is also considering an initial public offering, said the people who declined to be identified because the talks are confidential and no decision has been reached. No agreement is imminent, the people said. Marc Ocskay, a spokesman for Glencore, and Xstrata spokeswoman Claire Divver both declined to comment.
A deal would help Baar, Switzerland-based Glencore to fund its activities and ease liquidity constraints, while providing some of the closely held group’s partners with the ability to exit their stakes in the company. Glencore, led by Chief Executive Officer Ivan Glasenberg, had its credit rating cut by Standard & Poor’s to the lowest investment grade in December 2008 after commodity prices tumbled.
“There is growing pressure on Glencore partners, both from within the company and outside, to lay out the plan for the restructure and how they propose to provide the greater liquidity which is needed,” said John Meyer, head of natural resources at investment bank Fairfax I.S. Plc in London, who has a “buy” recommendation on Xstrata shares. “Backing into Xstrata is one very clear way of providing that liquidity and also providing an exit for some of those partners.”
Xstrata shares gained 6.2 percent to 19 Swiss francs at 9:22 a.m. in Zurich trading.
‘Qualifying Events’
Glencore, which trades metals and oil and controls mines and smelters, in December sold as much as $2.2 billion of bonds to investors including BlackRock Inc. and Government of Singapore Investment Corp. The bonds convert upon an IPO or “other pre-determined qualifying events.” Glencore said.
The trader is facing pressure on how it will deliver equity to investors, one of the people familiar with the matter said. The terms of the bonds gave Glencore a pre-conversion equity value of $35 billion, the company said in December.
Advisers are working on a two-stage proposal in which Glencore would merge with Xstrata in a “reverse takeover” and then reduce its stake in the enlarged group to below 40 percent, the Sunday Telegraph said yesterday, without saying where it got the information. Xstrata management would retain control of the combined company, the newspaper said.
Rival to BHP
Xstrata, led by Chief Executive Officer Mick Davis, is the largest producer of coal burned by power stations and fourth- largest producer of copper and nickel. For the Zug, Switzerland- based company, which has a market value of 31.9 billion pounds ($49 billion), a merger would create a mining group rivaling BHP Billiton Ltd., the world’s largest, with operations from Peru to Kazakhstan.
Davis expanded Xstrata through more than $35 billion of acquisitions since it sold shares in an IPO in London in 2002.
Glencore’s senior staff agreed to defer their first termination payment in the event of their departure until at least 2012 in an attempt to strengthen the company’s finances, the trader told bondholders in March 2009,
Commodity prices have recovered since then. Copper rebounded 64 percent on the London Metal Exchange in the past year, aluminum gained 46 percent and nickel more than doubled.
‘Big Question’
“The big question is whether this transaction calls the top of the commodities market,” Meyer said. “It may be several years away, but the Glencore partners may be preparing their exit now in the event the top of the market comes.”
BHP, which is based in Melbourne, had a market value of A$210.7 billion ($194 billion) at the close of trading on April 30. It had sales in the year to June 30, 2009 of $50.2 billion, according to data compiled by Bloomberg. Glencore’s sales in 2009 were $106.4 billion, the company said March 10.
Morgan Stanley and Citigroup Inc. are working with Glencore, while Xstrata is advised by Deutsche Bank AG and JPMorgan Cazenove Ltd.
As well as trading commodities, Glencore owns 8.7 percent of Moscow-based United Co. Rusal, the world’s largest aluminum producer, controls zinc mines in Peru and Kazakhstan, coal mines in South Africa, and smelts copper in the Philippines.
To contact the reporters on this story: Brett Foley in London at bfoley8@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net
Last Updated: May 3, 2010 03:23 EDT
