Glencore International, Xstrata Could Make the Next Biggest Deal in Global Commodities

Commodities supplier Glencore International (PINK: GLCNF) could be on the cusp of a multibillion-dollar bet on commodities with mining company Xstrata PLC (PINK: XSRAF).

Switzerland-based Xstrata announced today (Thursday) that Glencore approached the company for an all-share offer in a "merger of equals." Glencore already owns 34% of Xstrata and wants to buy the remaining shares, worth $35 billion (21.9 billion pounds) based on Wednesday's closing price.

The result would be a global commodities giant with an $80 billion market value.

"The combined business of Glencore and Xstrata would be greater than the sum of its parts," Charles Cooper, a mining analyst at Oriel Securities, told The New York Times. "Any deal would put the new company in the same category as the major players like Rio Tinto or BHP Billiton."

The deal would be the most significant to the mining sector since BHP and Billiton joined in 2001 to form BHP Billiton Ltd. (NYSE ADR: BHP), the largest mining company by market capitalization.

Glencore International with Xstrata: A Mining Superpower

Glencore is the world's largest publicly traded commodities supplier. It went public in May 2011 in London's biggest-ever initial public offering (IPO), worth roughly $10 billion. The company said when it filed for the IPO it planned to use the cash for acquisitions.

Xstrata is a leading producer in seven commodities, according to its Web site. It's the world's fourth-largest metals and mining company, and has a market capitalization of about $50 billion.

Glencore International wants to expand its business from the low-margin metals processing it currently focuses on. The deal would give Glencore access Xstrata's profitable coal, copper, and nickel mines all over the world and create a well-rounded industry leader in a bullish sector.

"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., told Bloomberg News. "On one end you have great mining expertise, on the other you've got great marketing expertise. Two and two together should make five."

A Glencore International-Xstrata entity would have more diversification than other global commodities players, with copper and coal being its biggest earnings drivers.

Under M&A rules in the United Kingdom, Glencore must announce a firm intention of an Xstrata offer by March 1. Previous Xstrata merger attempts have failed to materialize, but analysts think this one is different.

"This may be the rare case where a nil premium merger of equals in which shareholders of both companies share the synergies is possible and maybe even sensible and likely," Jefferies Group Inc. (NYSE: JEF) analyst Christopher LaFemina said in a note Thursday. "A deal like this would never be easy, but now is as good a time as any for it to happen."

The news will likely ignite more M&A activity in the metals and mining sector. Miners are loaded with cash and want to capitalize on China's industrial growth. Global mining deals hit $98 billion last year, according to Bloomberg data.

Glencore International closed with a 6.52% gain Thursday in London trading; Xstrata ended up 10.43%.

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