Glencore and Xstrata in talks on €62bn union

GLENCORE INTERNATIONAL the world’s largest publicly traded commodities supplier, is in talks with Xstrata to merge in a deal that would create a €62 billion rival to BHP Billiton Ltd.

Glencore, which already holds 34 per cent of the Zug, Switzerland-based mining company, made an approach regarding an all-share “merger of equals”, Xstrata said yesterday.

Glencore said there was no certainty of an offer. The transaction, driven by Glencore chief executive Ivan Glasenberg, would be the industry’s largest. The approach drove up mining shares from Sydney to London as investors anticipated a round of consolidation.

Rising commodity demand from developing nations and the deteriorating quality of mineral reserves is spurring producers to combine and boost efficiency.

The combined company may be valued at about €62 billion after excluding Glencore’s £11 billion (€13.22 billion) stake in Xstrata.

“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,” said Prasad Patkar, a portfolio manager at Platypus Asset Management in Sydney.

“On one end you have great mining expertise, on the other you’ve got great marketing expertise.”

The combination would bring together two groups that separated a decade ago when Xstrata bought Glencore’s Australian and South African coal mines for $2.5 billion and went public in London. It would also reunite Xstrata chief executive Mick Davis (53) with Glasenberg (55), a former coal trader who led Glencore to a $10 billion initial public offering in May.

“This may be the rare case where a nil-premium merger of equals in which shareholders of both companies share the synergies is possible, and maybe even sensible and likely,” said Christopher LaFemina, an analyst at Jefferies Group.

A transaction may bring savings of as much as $704 million, Credit Suisse Group AG said in October.

BHP, the largest miner, withdrew from what would have been the world’s biggest mining deal – a $66 billion offer for Rio – in 2008.

BHP has a market value of £126.9 billion. Rio is valued at £77.6 billion and Xstrata at about £36.5 billion. – (Bloomberg)