Glencore and Xstrata agree $90bn deal

The logo of Swiss commodities giant Glencore is seen at its headquarters on October 12, 2011 in Baar near Zug

Story highlights

  • Glencore and Xstrata announce an all-share merger that would create a $90bn giant
  • Glencore's shareholders will control 55 per cent of the new company, to be called Glencore Xstrata International
  • The deal comes less than a year after the trading house floated its shares
  • It would shake up the mining sector in a similar fashion to the multibillion-dollar combination of BHP and Billiton in 2001
Glencore and Xstrata on Tuesday announced an all-share merger that would create a $90bn giant combining the world's largest commodities trading house with one of the biggest miners of thermal coal, copper, nickel and zinc.
Under the agreement announced in a joint statement, investors in the miner would receive 2.8 Glencore shares for every Xstrata share they hold. That ratio puts a greater relative value on Xstrata shares than most investors had expected, representing a 15.2 per cent premium over the closing share price on February 1.
"We have a fantastic opportunity to create a new powerhouse in the global commodities industry," said Ivan Glasenberg, chief executive at Glencore.
Mr Glasenberg and Mick Davis, his counterpart at Xstrata, agreed the make-up of the combined company's board and senior management. Sir John Bond, Xstrata's chairman, will stay on as chairman of the enlarged group. Mr Davis will become chief executive and Mr Glasenberg deputy chief executive.
Mr Davis said in a statement that the merger offered "a unique opportunity to create a new business model" to respond to a changing environment. "It is the logical next step for two complementary businesses," he added.
Glencore's shareholders will control 55 per cent of the new company, to be called Glencore Xstrata International, with Xstrata's shareholders controlling the rest. Glencore shares rose 1.3 per cent to 466.6pp, while Xstrata was down 2 per cent at £12.35 in early trading in London, making it one of the biggest fallers on the FTSE 100.
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The merger plan -- codenamed "Everest" in a nod to a joint Himalayan expedition by the two companies' chairmen a few years ago -- marks the culmination of five years of attempts to combine the two companies by Mr Glasenberg.
The deal comes less than a year after the trading house floated its shares, raising $10bn and turning its top executives into billionaires overnight.
The merger would shake up the mining sector in a similar fashion to the multibillion-dollar combination of BHP and Billiton in 2001 that triggered a decade of consolidation in the industry. The combined company would rank as the world's fourth largest mining group by market capitalisation, behind BHP Billiton, Vale of Brazil and Rio Tinto. Industry observers said the merger would in the medium term give the new company the financial firepower to bid for rivals, including Anglo American, Fortescue, ENRC and others.
The deal, which both companies have described as a "merger of equals", is set to be implemented via a so-called "scheme of arrangement", which requires 75 per cent of shareholders to agree. This differs from a straightforward offer to shareholders, which would only require 50 per cent agreement.
Three quarters of Xstrata's shareholders would have to approve the deal -- with Glencore's 34 per cent holding unable to vote -- meaning that only 16.4 per cent of Xstrata's shareholders need to vote against the deal to block it. Nonetheless, people involved in the discussions are confident of broad-based acceptance from shareholders, noting that many of the large institutional shareholders in Xstrata also own Glencore shares.
Xstrata and Glencore disclosed their annual results together with the merger details. The mining group said that net profits, excluding exceptional items, rose 12 per cent to $5.78bn, in line with the consensus estimate, on the back of higher metal prices.
Glencore published an estimate of its financial results, which the trading house will restate on March 5. It said its net profit in 2011 rose to $4.06bn, up 7 per cent from last year, on the back of stronger metal prices and higher production, but weighed down by falling profits in trading, particularly in agricultural commodities.
The companies said that they hoped to close the transaction in the second half of the year. Glencore has agree to pay a so-called "reverse break fee" of £298m to Xstrata if its board withdraws the support for the merger.
Xstrata is being advised by Deutsche Bank, Goldman Sachs, Nomura and JPMorgan. Citigroup and Morgan Stanley and are advising Glencore. Linklaters and Freshfields are providing legal advice. Michael Klein, the former Citi senior banker and now independent dealmaker, also advised.