Xstrata PLC and Glencore International AG are in talks for a merger that would create the world's third-largest mining company and dramatically alter the industry's landscape.
Xstrata, which is already 34%-owned by Glencore, said in a statement early Thursday that it has been approached by Glencore about "an all share merger of equals." It indicated that no offer has been made. Xstrata had a market value prior to the announcement of £33.2 billion ($52.6 billion), while Glencore's was £29.9 billion.
Taking into account Glencore's stake in Xstrata, the combined company would have a market cap of about $80 billion.
In an early indication of crucial investor support for the tie-up, shares of the two companies, which are both based in Switzerland, rose in London on the news. Xstrata was up 12.1% to 1255 pence a share, while Glencore was up 3.5% to 446.9 pence.
Under U.K. takeover rules, Glencore has until March 1 to announce a plan to bid for Xstrata or that it won't make an offer, though that timetable can be extended.
Combining the two companies would create a juggernaut in the mining and trading of a number of commodities that are key to the global economic machinery. Xstrata issued its statement after news of the talks was reported by Bloomberg.
Glencore Chief Executive Ivan Glasenberg has long coveted a merger with Xstrata, which he sees as a way to secure more product to push through Glencore's lucrative trading channels, and as a means to create heft to compete more effectively with industry giants BHP Billiton and Rio Tinto PLC, the world's largest mining companies, respectively. Credit Suisse said in a note in October that such a merger could generate $246 million to $704 million in synergies. Indeed, Mr. Glasenberg staged an initial public offering of his secretive company last May—the U.K.'s largest-ever IPO —to facilitate the deal with Xstrata.
But getting to the finish line on a deal will not be easy, especially now that the talks have become public. Mr. Glasenberg has tried unsuccessfully before to come to agreement on a deal with his opposite number at Xstrata, Mick Davis, including in the months leading up to the IPO. Though the two men share a long history—they have known each other since their school days in South Africa—their relationship at times has been tempestuous. As recently as last week, a person familiar with the matter indicated that the two sides were still far apart on how to value each company in any deal.
One source of tension is the historical wariness on the part of Xstrata investors to strike a deal with a complicated and opaque company that some fear would undervalue their shares. Mr. Glasenberg in the past has talked about a deal to purchase Xstrata, even though Thursday's statement referred to a merger of equals, which could indicate a change of approach.
Another potential obstacle to a deal could be antitrust authorities who have flexed their muscles lately on both sides of the Atlantic, with European regulators just this week blocking the merger of German exchange operator Deutsche Börse AG and NYSE Euronext.
Even if the two sides do manage to strike a deal, they will have their work cut out for them making it work. "Mergers of equals," in which neither side takes the reins, are notoriously difficult to pull off, and in the case of Xstrata and Glencore will be all the more difficult given their distinct cultures and the strong personalities of their respective leaders.
Should the talks ultimately lead to a deal, it would represent the capstone to remarkable careers for both Mr. Glasenberg, whose net worth clocked in at roughly $10 billion at the time of the IPO, and Mr. Davis. Glencore was founded in 1974 by Marc Rich. The former fugitive commodities trader, famously pardoned by President Bill Clinton in his last days in office, sold the business to his lieutenants in 1994. Mr. Glasenberg took over as CEO eight years later. He and his partners have since built Glencore into one of the world's largest private companies, with 2010 sales of $145 billion.
Glencore is essentially a trading operation integrated with a collection of assets such as mines and stakes in publicly traded companies including Xstrata and Russian aluminium giant United Co. Rusal. Xstrata traces its roots back to 1926 but the Swiss miner was reborn in 2001 when the current management team joined.
Xstrata simultaneously struck a $2.5 billion deal to buy a package of coal assets that Glencore had planned to take public before the Sept. 11, 2001, terrorist attacks occurred. That coal business became the backbone of a company that is now also a major producer of other commodities including copper and zinc. The IPO and coal deal unleashed Mr. Davis's deal-making urge, resulting in a string of takeovers which culminated in the $18.8 billion purchase of Falconbridge Ltd. in 2005.
read more: Olympus Wealth Management
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