Glencore / Xstrata: familiar path

Financial Times

Glencore’s planned buy-out of the rest of Xstrata wins no prizes for originality. After all, Xstrata owes its creation to a $2.5bn coal deal struck a decade ago with Ivan Glasenberg’s commodities trader-cum-miner. Glencore held on to a 34 per cent stake in Xstrata, which Mick Davis has transformed into a diversified miner worth $58bn. The two have discussed a reunion before, but Mr Davis resisted it while Glencore was privately-held. However, Glencore’s $10bn initial public offering last year has given it an acquisition currency. The companies say they are discussing an $80bn merger of equals, but it should be seen as a normal takeover, with Glencore doing the taking over. So what premium should Xstrata’s minorities demand?

There is little overlap between the two companies. Glencore markets Xstrata’s ferrochrome and nickel output, and advises on its coal sales. So genuine cost synergies, the ones investors should focus on, are likely to be small – perhaps only $100m after tax. Capitalised, say that is worth $1bn. Xstrata’s shares jumped by multiples of that on Thursday. That means investors believe in the idea that a deal would result in considerable revenue synergies. Credit Suisse puts these at about $600m annually, mostly flowing from increased metals volumes through Glencore’s trading platform. That is a lot to bank on, especially if customers (hello China) get nervous. But Glencore shareholders have to believe it if their company pursues this “merger” at current share prices. Holders of Glencore should normally resist dilution. But then again they have to play the game to get any synergies at all.

Alternatively, investors may ignore the synergy arguments and decide that the two companies are entering new territory. It is not a BHP Billiton-Rio Tinto style deal nor an Xstrata-Anglo American one. Instead, combining Xstrata and Glencore creates the first mega vertically-integrated commodities business. BHP Billiton tried to do it from scratch, and gave up. If Glenstrata nails it, who knows?