Xstrata's fight or flight question

The prospect of a Glencore-Xstrata tussle is tantalising and if it ends in a merger, it could lead to a new mining house in the same league as BHP Billiton and Rio Tinto.

This could get interesting. Glencore’s Ivan Glasenberg has finally made his long-awaited approach to Xstrata, proposing a merger of equals. Will Xstrata’s Mick Davis resist it or fight for a premium?

The prospect of a tussle between two of the resource sector’s master strategists is tantalising and made even more intriguing by the fact that Glencore already owns 34.5 per cent of Xstrata, whose creation it sponsored and with which it has deep business relationships. That will complicate any Xstrata response and virtually rules out any prospect of a counter-bid.

It isn’t inevitable that Davis will attempt to fight off Glencore’s overtures. Both Davis and Glasenberg are on the record as supporting the concept of a merger which would create a sprawling resource and commodities trading group with a market capitalisation of about $80 billion. Where they have differed in the past is that Davis has made it clear that if there is to be a combination, he wants a big takeover premium for his shareholders.

Instead Glasenberg – who floated the previously secretive Glencore last year to make it more transparent to the market and Xstrata’s shareholders, and to gain a market valuation of his group as a preliminary step towards a merger – has proposed an all-share merger of equals.

If reports in London that he has offered to be deputy to Davis in the merged entity are correct, Glasenberg has tried to defuse one of the most obvious obstacles to a deal – the 'social issues’ that would arise if Davis, who has built one of the world’s biggest resource companies almost from scratch, were to be relegated to the second tier of management.

The logic of the combination is clear. Glencore is an unusual group, combining commodity trading with ownership of resources, logistics and port facilities in a fashion that gives it an exposure to the entire resource-sector value chain – and near-unique market intelligence.

A merger with Xstrata would not only bring with it ownership of a far larger and more diversified suite of resource assets but shift the balance of the group towards resource ownership, a rational transformation if, like Glasenberg and Davis, one is bullish about the long-term outlook for commodity volumes and prices.

It would also almost complete the consolidation at the big end of the resource sector and confer additional market power to the producers, which might be an issue for competition regulators, particularly in customer nations.

A combined group would give the group nearly a third of the seaborne trade in thermal coal and add big physical positions in copper, zinc and nickel to Glencore’s commodity trading business.

There is already speculation that a combined Glencore/Xstrata would subsequently move on Anglo American, which has a market capitalisation of around $55 billion, to create a mining house in broadly the same league as the industry heavyweights, BHP Billiton and Rio Tinto.

Xstrata had an unsuccessful tilt at Anglo in 2009 when Anglo’s shareholders were discontented and its chief executive, Cynthia Carroll, was under real pressure. Anglo and Carroll are in a much better and less vulnerable condition today. In any event, the merger has to occur, or not, before attention turns to what the next step, if any, might be.

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