The Xstrata deal, WSJ. Will it pass antitrust review?
Glencore Must Dig Deeper for Xstrata
By ANDREW PEAPLE
Ivan Glasenberg is a man in a hurry.
Just eight months after Glencore's $59 billion stock-market flotation, the chief executive of the Swiss mining giant has proposed an all-share merger of equals with sister company Xstrata in a deal that could create a company worth $82 billion. Mr. Glasenberg has made no secret of his ambition to re-combine the two groups, which were split apart following Xstrata's 2002 IPO. Glencore has until March 1 to make a formal offer. But Xstrata shareholders should demand that Glencore pay a premium.
First, a deal without a premium won't be a true merger of equals. Glencore already owns 34.1% of Xstrata, whose market value was $34.6 billion at Wednesday's closing price. Add that to Glencore's own market value of $47.2 billion, and its shareholders will control roughly 58% of the combined group. What is more, around 80% of Glencore's shares are held by its employees, giving them 46% of the combined group. Though management and board responsibilities could be split equally, it seems Glencore's current shareholders will have the upper hand. Having Mick Davis, Xstrata's CEO, as the combined company's head might soothe some nerves, but investors might worry how long Mr. Glasenberg might be prepared to play second fiddle.
Second, it isn't clear a merger will create value. Cost savings are likely to be minimal, at up to $110 million, according to Credit Suisse. Glencore has previously argued that the real value of a deal lies in economies of scale, in particular the opportunity for Glencore's traders to source cheap product from Xstrata's mines. But Mr. Davis has historically questioned these benefits. At best, revenue and cost synergies could total only about 5% of expected 2012 combined net income, or about $475 million, according to Credit Suisse. Capitalized, that is worth around $4.8 billion. On the other hand, Xstrata has strong organic growth opportunities on its own that investors may be reluctant to see diluted by exposure to Glencore's low-growth trading operations.
Third, Xstrata investors may wonder why now. By Wednesday's close, Glencore's shares had fallen 18% since its May float, but Xstrata's had fallen 20%, with both stocks significantly underperforming their peers. But the outlook for the price of copper, Xstrata's main commodity, has recently started to look more bullish, rallying from October's low of $6,635 a metric ton to $8,440 a metric ton amid talk it might regain its 2011 peak of $10,000 a ton. Mr. Glasenberg is a canny trader, and the timing of his approach looks opportunistic.
But Xstrata shareholders shouldn't raise their hopes of a large premium from Glencore. The reality is that rival bidders are likely to be discouraged by the need to offer a hefty premium to persuade Glencore to sell; besides, other major miners seem set on organic growth strategies. A merger with Glencore would at least resolve what both sides agree is an unsustainable situation. But unlike Mr. Glasenberg, Mr. Davis has the luxury of time. He should use it to full advantage.
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