Glencore in talks to buy Xstrata in blockbuster deal – by Clara Ferreira-Marques and Victoria Howley, Reuters (Sudbury Star – February 3, 2012)

The Sudbury Star is the City of Greater Sudbury’s daily newspaper.

LONDON — Commodities trader Glencore is in talks to buy mining group Xstrata in an all-share transaction that could create a combined group worth more than 50 billion pounds (US$79 billion), shaking up the industry with its biggest deal to date.

Glencore, the world’s largest diversified commodities trader, already owns 34% of Xstrata and a tie-up between the two — a deal which would trump Rio Tinto’s $38 billion acquisition of Alcan in 2007 — has long been expected, as Glencore aims to add more mines to its trading clout.

“We’ve always had the belief these two companies should be together,” Glencore Chief Executive Ivan Glasenberg told a financial conference in Moscow. Xstrata owns Xstrata Nickel, which in Sudbury employs about 1,000 people who work at Nickel Rim South mine, Fraser Mine, a mill and a smelter.

Investors and analysts say the main potential stumbling block, after years of on-off talks, will be the price — the premium, if any, offered to Xstrata shareholders, who are already signalling they want to see the growth profile of their company recognized in any offer, however friendly, and will require a sweetener to approve the move.

But any agreement will also hinge on the relationship between the ambitious South African bosses of both companies — Glencore’s Glasenberg and Mick Davis at Xstrata.

News that Xstrata, the world’s fourth-largest diversified miner, had received an approach boosted shares in both companies, sending Xstrata up more than 14% and Glencore up over 8%.

Both sides said there was no certainty an offer would be made and the deal was described as an all-share “merger of equals.” Under UK rules, Glencore has 28 days to make an offer, though that could be extended at Xstrata’s request.

The two sides have little overlap in mining, meaning a combined “Glen-strata” would get synergies from some areas of marketing but would otherwise combine industrial and operational assets to create the world’s largest zinc and thermal coal producer and a heavyweight in copper and nickel.

Analysts at Credit Suisse estimate the synergies at around $468 million, roughly 5% of combined 2012 net income, thanks to a better use of Glencore’s marketing capabilities.

Any deal is expected to be agreed, or friendly, meaning Glasenberg and Davis, along with Xstrata shareholders, have to settle on one thing that has so far kept the two apart — valuation, and what premium Glencore will need to pay.
Davis and his Chairman John Bond, whose appointment last year was widely read as a signal to Glencore given the former HSBC (HSBA. L) boss’s tough reputation, are expected to be resistant to any deal that does not recognise what they see as Xstrata’s growth potential.

Glencore, though a shareholder, would not be able to vote on a deal, leaving the decision outside its hands.

“I don’t see any scenario where a nil-premium merger will get shareholder approval,” said one top-five shareholder, who declined to be named because of the sensitivity of the matter.

“We still haven’t seen Glencore’s Q4 figures either and there’s a bit of concern about the marketing profitability on that number. I’m assuming there’s nothing untoward … but even with that, I would expect to see some degree of premium.”

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