Swiss marriage: tears or cheers?

AUSTRALIA would be a crucial part of the resources empire to emerge from an $82 billion marriage of Swiss companies Xstrata and Glencore, and analysts say the new entity would be likely to expand here 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 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 Swiss bank UBS.

The merged company would also have 28 per cent of its assets housed in Australia, meaning that thousands of Australian jobs are potentially affected by the merger talks in Europe.

Most of those jobs are in Queensland and New South Wales, where Xstrata has 17 coalmines.

Staff at Xstrata coalmines in NSW were given information on the merger situation when they arrived at work yesterday.

While the merger is estimated to result in savings of close to $US1 billion ($933 million), there was no indication yesterday that Australian jobs were at risk.

Mid-tier Australian 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 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 in the past year, while BHP and Rio Tinto's London-listed shares have fallen by 12.7 per cent and 9.9 per cent respectively in the same period.

The analyst said Mr Davis could become acquisitive again 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 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.

One of the stocks at the centre of recent merger activity in the coal sector Whitehaven Coal revealed last night that heavy rains in north-eastern Australia would rob it of at least one week's worth of production.

Four of Whitehaven's open-cut mines have been temporarily closed because of heavy rain and water in the pits.

Whitehaven is expected to soon finalise a $5 billion merger with Nathan Tinkler's Aston Resources.

Whitehaven shares fell 15? to close at $5.48 yesterday.

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Frequently Asked Questions about this Article…

What is the Xstrata and Glencore merger and why does it matter to investors?

The Xstrata‑Glencore deal is a proposed $82 billion merger between two Swiss companies that would create a major global resources group. For investors, it matters because the combined company would have significant exposure to Australian mines and could reshape the global coal and resources sector through cost savings and future mergers and acquisitions.

When might a formal offer from Glencore for Xstrata happen?

According to the article, a formal offer from Glencore was likely within 26 days and could possibly arrive as early as the following week from the report — so investors should watch for an official bid in the near term.

How much of the merged company's revenue and assets would come from Australia?

Swiss bank UBS estimated the merged entity would rely on Australian mines for about 33% of its revenue and would have roughly 28% of its assets housed in Australia, highlighting meaningful Australian exposure for the new group.

Could the Xstrata‑Glencore merger put Australian mining jobs at risk?

The article notes thousands of Australian jobs could be affected because many assets are in Australia — especially in Queensland and New South Wales where Xstrata operates 17 coal mines. However, while the merger was expected to deliver around US$1 billion in savings, there was no indication at the time that Australian jobs were immediately at risk.

What does the merger mean for mid‑tier Australian coal companies and takeover activity?

Analysts in the article warned that mid‑tier Australian coal companies could be vulnerable, since the new larger entity was expected to pursue acquisitions. That said, one analyst said Australian coal stocks already incorporate takeover premiums, so the merger might not send all coal stock prices sharply higher.

How have Xstrata and other major miners performed recently and what could that mean for M&A?

Xstrata’s London‑listed shares had fallen about 20.2% over the past year, while BHP and Rio Tinto fell about 12.7% and 9.9% respectively. The article suggested Xstrata CEO Mick Davis, known for being acquisitive, may be more able to pursue M&A if he stayed on in the merged entity.

What happened to Whitehaven Coal’s production and share price recently?

Heavy rains in north‑eastern Australia forced temporary closures at four of Whitehaven’s open‑cut mines, costing at least a week of production. The company was also in merger activity — expected to finalise a $5 billion deal with Nathan Tinkler’s Aston Resources — and its shares fell to close at $5.48 the day reported (around a mid‑double‑digit decline).

As an everyday investor, what key developments should I watch related to the merger story?

Keep an eye on an official Glencore offer for Xstrata (the article said one was likely within 26 days), any statements about job cuts or asset sales in Australia, regulatory or shareholder responses, and how nearby takeover activity affects mid‑tier coal stocks such as Whitehaven and Aston Resources. Also monitor analyst commentary about takeover premiums and expected cost savings.