Glencore Offers to Buy Out Rest of Xstrata

By Elisabeth Behrmann and Brett Foley - Feb 2, 2012 5:30 PM GMT+0700

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Feb. 2 (Bloomberg) -- Glencore International Plc is nearing an agreement to combine with Xstrata Plc, adding mines from Africa to Asia to the world's largest listed commodity trader, said two people with knowledge of the plan. Elliott Gotkine reports on Bloomberg Television's "First Look" with Caroline Hyde. (Source: Bloomberg)

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Feb. 2 (Bloomberg) -- Peter Voser, chief executive officer of Royal Dutch Shell Plc, discusses the company's fourth-quarter profit reported today, dividend policy and investment focus in oil-rich shale in the U.S. He speaks from London with Owen Thomas on Bloomberg Television's "On the Move." (Source: Bloomberg)

Glencore International Plc (GLEN), the world’s largest publicly traded commodities supplier, is in talks to buy the shares in Xstrata Plc (XTA) that it doesn’t already own to add coal, copper and nickel mines from Africa to Asia.

Glencore made an approach about an all-share offer for “a merger of equals,” Zug, Switzerland-based Xstrata said today in a statement to the London stock exchange. Glencore holds 34 percent and the rest of the company is valued at 21.9 billion pounds ($35 billion) based on yesterday’s closing price. Glencore said in a statement there’s no certainty of an offer.

Joining Xstrata with Glencore, located two miles away in Baar, would reunite two groups that separated a decade ago when Xstrata bought Glencore’s Australian and South African coal mines for $2.5 billion and went public in London. The combined company may be valued at about 52 billion pounds after excluding Glencore’s stake in Xstrata.

“Glencore being such a dominant trader and marketer of commodities, and Xstrata being such a strong operator of difficult assets, I think it creates enormous value,” Prasad Patkar, who helps manage about $1 billion at Platypus Asset Management Ltd. in Sydney, said by phone before the statement. “On one end you have great mining expertise, on the other you’ve got great marketing expertise. Two and two together should make five.”

Xstrata Shares

Xstrata shares rose as much as 14 percent in London, the most since April 2009, and Glencore rose 5.6 percent. Glencore shares gained as much as 6 percent in Hong Kong before they were suspended from trading after Bloomberg reported the potential deal, citing two people with knowledge of the plan. Shares in mining companies in Australia gained the most in more than two weeks as measured by the S&P/ASX 200 Resources index.

Under U.K. takeover rules, Glencore is required to announce a firm intention to make an offer by no later than 5 p.m. on March 1, Xstrata said.

A transaction may generate savings of as much as $704 million, Credit Suisse Group AG said in a report in October. A deal would be the biggest for Xstrata since it ended a 29.2 billion-pound offer for London-based Anglo American Plc (AAL) in October 2009 after Anglo’s board snubbed the approach. BHP Billiton Ltd. withdrew from what would have been the world’s biggest mining deal, a $66 billion offer for Rio Tinto Group in 2008.

“Combining gives them that much more scale to compete against some of the bigger players,” including BHP and Rio Tinto (RIO), Cameron Peacock, a Melbourne-based market analyst at IG Markets Ltd. said by phone.

Credit Default Swaps

Xstrata was 9.5 percent higher at 1,226 pence at 9:35 a.m. in London, valuing it at about 36 billion pounds. Glencore gained 4.2 percent to 450.05 pence at the same time.

Credit-default swaps on Glencore tumbled 83 basis points to 240, the lowest since June, according to CMA prices at 9 a.m. in London. A decline signals improvement in perceptions of credit quality.

Glencore’s 1.25 billion euros ($1.64 billion) of 5.25 percent bonds maturing in March 2017 are trading at about 105.6 cents on the euro to yield 4 percent, after the price rose as high as 107.6, according to Bloomberg Bond Trader prices.

Joining the companies would reunite Glencore Chief Executive Officer Ivan Glasenberg, 55, with his Xstrata counterpart Mick Davis, 53.

Coal Trader

Glasenberg, a former coal trader who led the company to a $10 billion initial public offering in May, said in August the commodities trader is “aggressively” seeking mergers and acquisitions as market valuations slide. He said in an April interview there was “good value” in a combination with Xstrata. He declined to comment today on the deal in Moscow.

A South African native and Australian citizen, Glasenberg is the second-richest person in Australia with an estimated net worth of $7.2 billion, Forbes Magazine said today. Gina Rinehart, the Australian mining heiress and media investor, is the richest person, valued at $18 billion.

Mining takeovers are accelerating as companies struggle to replace depleting deposits and China’s industrial growth stokes metals demand for construction, cars and appliances. Global mining deals swelled to $98 billion last year, the highest level since 2007, from $76 billion in 2010, according to data compiled by Bloomberg. The average premium for takeovers last year was 23 percent, according to the data.

‘Rude Health’

“There’s really nothing technically that should be preventing large-scale M&A activity,” Daniel Rohr, an analyst at Morningstar Investment Services Inc. in Chicago, said by telephone yesterday. “Balance sheets across the industry are in rather rude health and large miners have massive cash balances that seem to grow larger with each passing quarter.” Mining companies may spend $134 billion developing assets this year, up 23 percent from 2010, according to a report last month by Citigroup Inc. Glencore had $18.3 billion in long-term borrowings as of Dec. 31 and Xstrata had borrowings of $7.2 billion, according to data compiled by Bloomberg. Both have a Baa2 rating from Moody’s Investors Service.

Combined, Xstrata and Glencore would report net income of about $11.2 billion in 2012 and Glencore would control about 65 percent of a merged company, assuming a takeover with no premium attached, Credit Suisse said in October.

Glencore, which owns mines, plants and warehouses, had a first-half profit of $2.5 billion, up 68 percent on a year earlier. It may post adjusted net income of $4.4 billion for 2011, according to the average estimate of 15 analysts surveyed by Bloomberg. It’s due to report earnings on March 5.

‘Major Competitor’

Joji Okada, chief financial officer of Mitsui & Co., Japan’s second-largest trading house, said the deal would create “a major competitor.”

“I’m concerned that the competition for developing resources will really intensify,” he told reporters in Tokyo today. “We feel that there’s a threat of a major competitor emerging.”

Xstrata’s Davis, a South African, built the group through more than $30 billion of deals since its purchase of Glencore’s coal mines and its London IPO in 2002, adding copper, nickel and zinc. His largest deal was the $18.1 billion acquisition of Canadian nickel producer Falconbridge Ltd. in 2006.

He abandoned a hostile bid for platinum producer Lonmin Plc in October 2008 after metal prices plunged and it withdrew from bidding for Australia’s WMC Resources Ltd. in 2005 after being trumped by BHP. (BHP) Xstrata produced 85.3 million metric tons of coal last year.

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Brett Foley in Melbourne at jriseborough@bloomberg.net

To contact the editors responsible for this story: Amanda Jordan at ajordan11@bloomberg.net; John Viljoen at jviljoen@bloomberg.net; Rebecca Keenan at rkeenan5@bloomberg.net