Xstrata and Glencore in talks over merger to create commodity giant worth £50bn-plus

Merger talks: Commodities trader Glencore wants to join forces with mining group Xstrata

Merger talks: Commodities trader Glencore wants to join forces with mining group Xstrata

Commodities trader Glencore has approached mining giant Xstrata about a 'merger of equals' that could lead to the creation of a new business worth more than £50billion.

The move would give both groups more scale to compete against bigger rivals such as miners BHP Billiton and Rio Tinto.

Glencore, the world's biggest commodities trader, with products including oil, coal, gold and foodstuffs, has been circling Xstrata for a number of years and has already built up a 34 per cent stake in the company.

But Glencore, which last May became the first company in 25 years to be fast-tracked into the FTSE 100 in London's largest ever flotation, must now make a formal offer to Xstrata or withdraw interest by March 1, in accordance with the UK's 'put up or shut up' rules.

Both sides said there was no certainty that any offer would be made by Glencore for Xstrata.

Xstrata shares soared 10 per cent or 115.25p to 1,234.75p by early afternoon, giving the firm a market value of around £36.1billion.

Glencore, with a market value of around £31.5billion, saw its shares jump 7 per cent or 28.65p to 460.4p - although this was still well below its listing price of 530p.

Ivan Glasenberg, the billionaire boss of Glencore whose personal stake is worth around £5.8billion, has advocated the value of a potential tie-up with Xstrata.

 

Glencore's flotation, which gave the group a market value close to £37.9billion at the time, was seen as the first stepping stone towards a merger between the two giants, which are headquartered a few miles apart in the cities of Zug and Baar in Switzerland.

Xstrata, which operates in 19 countries across the world, has attempted a number of mergers with rival miners in the past but to no avail.

It saw an approach to merge with Anglo American rebuffed in 2009, just nine months after it axed its £5billion bid for rival Lonmin.

Stock trend: Glencore shares are still well below their listing price of 530p

Stock trend: Glencore shares are still well below their listing price of 530p

View from the City

'Since its disappointing float last year, Glencore has struggled to regain the initiative with its shareholders, but today it has achieved that,' said Louise Cooper of BGC Partners.

'One of the reasons Glencore listed was to gain an acquisition currency - to use shares to fund mergers and acquisitions -  so we now may have the deal to go with the IPO [initial public offering].'

She said the timing of the news was interesting as it came just days ahead of earnings releases from both companies.

'When executives start to see their business decline and worry about future profits, they often talk to their investment bankers about deals. A merger or an acquisition can hide profit declines in the underlying business by making the accounts complicated and opaque and also by generating cost savings - an acquisition or merger can paper over falling profits,' said Ms Cooper.

And she added: 'The big macro risk for any commodities player at the moment is a global slowdown and in particular whether China suffers a hard or soft landing - this is the big question to which no one has the answer.' 

Tom Gidley-Kitchin of broker Charles Stanley said: 'Glencore will have been thinking about merging with Xstrata for much of the last half-decade. Xstrata has said for the last few years that Glencore has not raised the issue at all, although both sides have made their positions clear in response to questions by analysts and journalists – namely, that there is a strong strategic case but that it will come down to price.

'Therefore, we do not believe Glencore would have made any approach to Xstrata without already having planned its entire merger strategy. Also, it has said in the past that it will not go hostile, although obviously it could change its mind.

'So we believe that it has satisfied itself that it has the capacity to make an offer that will satisfy Xstrata’s board and shareholders. We therefore expect an agreement, sooner or later.'

Simon Denham of Capital Spreads noted the disparity between the rises in the two firms' share prices since the news broke this morning, and commented: 'It’s hard to see this being a merger of equals as their PR divisions are currently spinning.'

Economy worry: Xstrata shares have struggled amid concerns about a global slowdown

Economy worry: Xstrata shares have struggled amid concerns about a global slowdown

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