New empire may look to expand

AUSTRALIA will be a crucial part of the resources empire that is set to emerge from a $82 billion marriage of the Swiss firms Xstrata and Glencore, and analysts say the new entity could look to further expand its local presence through mergers and acquisitions.

By InvestSMART · 4 Feb 2012

By InvestSMART ·
4 Feb 2012

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A formal offer from Glencore is likely to emerge within 26 days - and perhaps as early as next week - after the two companies confirmed that merger talks were under way.

If successful, the merged entity would rely on Australian mines for 33 per cent of its revenue, according to an analysis by UBS.

The merged company would also have 28 per cent of its assets housed in Australia, meaning that thousands of local jobs are potentially affected by the talks that are under way in Europe. Most of those jobs are in Queensland and NSW, where Xstrata has 17 coal mines at present.

Staff at Xstrata coal mines in NSW were given information briefers clarifying the merger situation upon arrival at work yesterday.

While the merger is estimated to create close to $US1 billion worth of cost savings and "synergies", there was no indication yesterday that Australian jobs were at risk. Mid-tier local coal companies, however, could be vulnerable, with the new entity expected to be hot on the acquisition trail in the years ahead.

One analyst said Xstrata's chief executive, Mick Davis, was known to be keen on acquisitions but had been constrained by his company's underperforming share price in recent times.

Xstrata's London-listed shares have fallen 20.2 per cent over the past year, while BHP and Rio Tinto's London-listed shares had fallen by 12.7 per cent and 9.9 per cent respectively over the same period.

The analyst said Mr Davis could renew his acquisitive mood if he stayed on with the new entity. "It would give him a bigger platform and he'd probably reinvigorate some of his M&A aspirations," he said. But a CLSA analyst, James Stewart, said the merger was unlikely to send the share prices of Australian coal stocks soaring, as a busy period of mergers and acquisitions in the sector meant most stocks already had a takeover premium built into their price.

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Frequently Asked Questions about this Article…

What is the Xstrata and Glencore merger and how big is the deal?

The proposed merger between Swiss firms Xstrata and Glencore is described in the article as an about $82 billion 'marriage' that would create a major resources empire combining the two companies' assets and operations.

When is Glencore expected to make a formal offer for Xstrata?

According to the article, a formal offer from Glencore was likely to emerge within 26 days and could even appear as early as next week after the companies confirmed merger talks were under way.

How important would Australia be to the merged Xstrata–Glencore company?

UBS analysis in the article said the merged group would rely on Australian mines for about 33% of its revenue and would have roughly 28% of its assets based in Australia, highlighting the country’s central role for the combined business.

Could the Xstrata–Glencore merger put Australian coal jobs at risk?

The article notes thousands of local jobs could potentially be affected because many of Xstrata’s assets are in Australia (mostly Queensland and NSW, where Xstrata has 17 coal mines). Staff were given information briefers, but there was no immediate indication at the time that Australian jobs were at risk.

Will the merger deliver cost savings or synergies?

Yes. The merger was estimated in the article to create close to US$1 billion of cost savings and synergies for the combined company.

How might the merger affect takeover activity and acquisitions in the Australian coal sector?

Analysts quoted in the article expect the new entity to be active on the acquisition trail. One analyst suggested Xstrata’s CEO Mick Davis, known for being acquisitive, could be reinvigorated and pursue more M&A, which could make mid‑tier local coal companies vulnerable to takeover interest.

Will the Xstrata–Glencore deal make Australian coal stocks surge?

A CLSA analyst, James Stewart, said the merger was unlikely to send Australian coal share prices soaring because the sector was already experiencing a busy period of mergers and acquisitions and many stocks already priced in a takeover premium.

What recent share price moves for Xstrata, BHP and Rio Tinto were mentioned in the article?

The article reported that Xstrata’s London-listed shares had fallen 20.2% over the past year, while BHP and Rio Tinto’s London-listed shares had fallen 12.7% and 9.9% respectively over the same period.