The Glencore Xstrata deal, an all-share merger creating a $90 billion global mining industry powerhouse, would be the sector's biggest and could trigger the busiest year for M&A activity.
The companies announced the deal today (Tuesday) following Glencore's offer last week. Glencore would pay $41 billion for the rest of Xstrata's shares (Glencore already has a 34% stake).
Glencore International is the world's largest publicly traded commodities supplier, and Xstrata is the world's fourth-largest metals and mining company. A Glencore Xstrata deal would create a company rivaling global mining industry leaders BHP Billiton Ltd (NYSE ADR: BHP) and Rio Tinto Plc (NYSE ADR: RIO).
"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 from 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."
The new combined entity would be more diversified than other global commodities players, with copper and coal being its biggest earnings drivers. It would be the world's biggest coal exporter for power plants and the top integrated zinc producer.
The new mining industry giant also will go on the hunt for smaller businesses, and encourage other powerful players to do the same.
Glencore Xstrata Deal To Trigger Global Mining Industry M&A
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.
"M&A is a space that you'd expect the combined group to be in," Xstrata CEO Mick Davis, who will lead the new company, told Reuters. "We have a combined entity which has much greater flexibility to be opportunistic and capture the right opportunities when they are there."
"Midsize players will be gobbled up," Michael Locker of consulting firm Locker Associates told Canada's The Globe and Mail. "They don't have access to the capital. It's going to be very hard for medium-sized companies to compete."
M&A activity in the mining industry also will get a boost this year from low valuations, according to John Robinson, chairman of mining investment vehicle Global Mining Investments.
Robinson told The Wall Street Journal that many mining companies are still seeing healthy cash flow, and can take advantage of lower share prices to go after smaller companies. With global powerhouses like the new Glencore Xstrata combo, companies will need to gain scale to compete.
The formation of bigger commodities players will also create a less fragmented mining industry. Companies will control more of the market for certain metals and resources, and with acquisitions will do more of the metals processing and trading in house.
Shareholders Oppose Glencore Xstrata Deal
At least two of the top 10 Xstrata shareholders said they'd oppose the merger because it undervalued their shares.
Investors Standard Life Investments and Schroders own 5.6% of the shares needed for approval, and could persuade other investors to follow them. The Glencore Xstrata deal needs to be approved by 75% of shareholders.
"I'm in complete agreement with Standard Life and we intend to do exactly the same. This is a fabulous deal for Glencore, it's probably a great deal for the Xstrata management, but it's a poor deal for Xstrata's majority shareholders," Schroders' Richard Buxton told Reuters.
Glencore already has a 34% stake in Xstrata, but will not be allowed to vote on the deal. That means only 16% of shareholders need to vote against the Glencore Xstrata deal to block it.
News and Related Story Links:
- Money Morning:
Buy, Sell or Hold: Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX) is a Mining Play with a Major Upside
- The Globe and Mail:
Xstrata-Glencore deal a possible game changer
- Bloomberg News:
Glencore Offers to Buy Out Rest of Xstrata
- The Wall Street Journal:
Depressed Valuations, Strong Cashflow To Spark Mining M&A