Glencore to Buy Xstrata for $41B in Shares

By Firat Kayakiran and Jesse Riseborough - Feb 7, 2012 6:22 PM GMT+0700

Glencore International Plc, the world’s largest publicly traded commodities supplier, agreed to buy Xstrata Plc (XTA) for about 26 billion pounds ($41 billion) in shares in the biggest mining takeover.

Glencore offered 2.8 new shares for each one in the Zug, Switzerland-based coal exporter, the companies said in a joint statement today. That represents a premium of 17 percent based on Xstrata’s average share price over the past 20 days. Xstrata Chief Executive Officer Mick Davis, 53, will be CEO of the combined group while Glencore CEO Ivan Glasenberg, 55, will be deputy CEO and president.

The plan would create a business with $209 billion in sales, the companies said, combining Glencore’s global trading network for energy, metals and farming products with Xstrata’s coal, copper and zinc mines. The deal has prompted speculation of further mining takeovers as Glasenberg and Davis set up a company to challenge BHP Billiton Ltd. and Rio Tinto Group.

“This looks like it’s going to be a comprehensive new business model,” said Ian Kramer, director of energy and natural resources at KPMG. “I would not be surprised at all if you see this new giant coming in and sweeping up” other companies, Kramer said in an interview at the Mining Indaba in Cape Town.

The offer by Glencore, which already owns 34 percent of Xstrata, values the target at 39.1 billion pounds, the companies said. The premium compares with the 23 percent average paid in 2011 mining deals, according to data compiled by Bloomberg.

Xstrata ‘Undervalued’

Xstrata fell 2.1 percent to 1,234.5 pence at 10:16 a.m. in London. Glencore gained 0.6 percent to 463.7 pence. The merger values each Xstrata share at 1,290.10 pence.

At least two shareholders said they oppose the deal.

“The proposed exchange ratio clearly undervalues Xstrata’s assets and future earnings contribution,” David Cumming, Standard Life Investment’s head of equities, said in e-mailed comments. “It is our intention to vote against the deal unless the merger terms for Xstrata are materially improved.”

Schroders Plc said its head of U.K. equities Richard Buxton intends to vote against the deal, according to e-mailed comments from spokeswoman Estelle Bibby.

Glencore, which held a $10 billion initial public offering in London in May, and Xstrata have been talking about a merger for five years, Glasenberg said in a telephone interview today. “Since the IPO, we’ve been talking every few weeks,” he said. Davis said the companies have discussed the transaction “for many years.”

‘Merger of Equals’

The combination is “a merger of equals,” the companies said in their statement. It is expected to close in the third quarter of this year, Davis said on a conference call, after approvals from shareholders and antitrust regulators in countries including South Africa and China.

Synergies from the transaction will deliver annual gains of $500 million to $600 million, he said.

“This would mainly come from putting Xstrata production into Glencore’s marketing and trading system,” Davis said. “This would create such a different animal in the space with huge flexibility and optionality to get value from exploration to delivery of product,” he said in an interview. “No company has that capability.”

Xstrata shareholders other than Baar, Switzerland-based Glencore will hold 45 percent in the combined entity, to be known as Glencore Xstrata International Plc and listed in London and Hong Kong, the companies said. Its headquarters will be in Switzerland. Glencore has agreed to pay Xstrata a so-called break fee of 298 million pounds should it withdraw its offer.

John Bond

Xstrata Chief Financial Officer Trevor Reid will fill the role for the new company, with Glencore CFO Steven Kalmin as his deputy. Xstrata non-executive Chairman John Bond will be nominated for the same post in the combined company. The board will include Davis, Glasenberg and a further four non-executive directors from each company.

The combination forms a $90 billion natural resources group, fully integrated from mining, processing, storage, freight and logistics to marketing and sales, the companies said. The combined group will have operations and projects in 33 countries with 101 mines and more than 50 metallurgical facilities. It will have about 130,000 workers.

Marc Rich

Glencore was founded in 1974 as Marc Rich & Co. by the former fugitive U.S. financier. The company, which changed its name in 1994 after management bought out Rich, ended more than three decades of operating as a closely held partnership with its May IPO.

The copper-to-cotton trader owns mines, plants, ports and warehouses and employs 2,800 people at marketing units in 40 nations and about 54,800 at industrial units in more than 30 countries. Its oil shipping fleet comprises 203 vessels, according to a 2010 sustainability report that describes Glencore as among the world’s leading suppliers of sugar.

Glencore today said net income before exceptional items rose 7 percent to $4.1 billion in 2011. It expects to declare a final dividend of 10 cents a share, the company said in a statement on its website.

“2012 has started well across all areas of our business,” Glasenberg said. “Much of the market weakness experienced towards the end of the year has reversed and market volumes remain healthy.”

Swiss Roots

The takeover will create the world’s fourth-largest mining company, Glencore said. The trader’s market value has grown to about $50 billion at yesterday’s close from $1.2 billion at the time of its management buyout in 1994, it said.

Xstrata was founded as Sudelektra AG in 1926. The Swiss infrastructure investment company was renamed Xstrata in 1999, and Davis became CEO in 2001.

Since then, Davis has overseen its growth from a company with 2,500 staff and a market value of $500 million to one with 70,000 employees in 20 countries and a value of $58 billion. It is the fourth-biggest copper producer and mines more zinc ore than any other. Xstrata said today 2011 net income before exceptional items rose 12 percent to $5.79 billion after coal and metal prices gained.

Rising commodity demand from developing nations and the deteriorating quality of mineral reserves is spurring producers to combine and boost efficiency. 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.

Mining Deals

Mining companies may spend $134 billion developing assets this year, up 23 percent from 2010, according to a report last month by Citigroup Inc.

The combination 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. It would also unite their two South African CEOs in Davis and Glasenberg, Glencore’s largest shareholder with a 15.7 percent stake.

Glencore is working with Citigroup and Morgan Stanley as financial advisers, while Xstrata has hired Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Nomura Bank International Plc.

The mining industry’s biggest takeover to date is Rio Tinto’s 2007 acquisition of Alcan Inc. for $38 billion. BHP, the largest mining company, withdrew from what would have been the world’s biggest mining deal, a $66 billion offer for Rio, in 2008. BHP has a market value of about 130 billion pounds. while Rio is valued at 77.6 billion pounds.

To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net