Commodities trader Glencore International PLC, hoping to speed its $33-billion (U.S.) takeover of Xstrata PLC over its final hurdles, is expected to offer to sell part of the group’s zinc assets, meeting a midnight deadline to comply with EU antitrust concerns.
Industry sources said Glencore’s desire to avoid an in-depth investigation in Brussels – which would drag the already drawn-out merger with Xstrata into next year – would prompt it to respond to the call for disposals in zinc metal, where market concentration is most significant.
The sources said Glencore, which on Tuesday afternoon had yet to submit its proposals, would weigh the desire to complete the deal quickly against the desire to retain large European plants like Xstrata’s San Juan de Nieva refinery, the largest zinc production unit in the world.
“It’s not a huge part of the business and (zinc metal) is the only area that will see an increase in concentration such that it requires a remedy,” analyst Nik Stanojevic at Brewin Dolphin said. “I don’t think it is a deal-breaker.”
Glencore and Xstrata shares are currently trading at levels that imply a ratio of 2.85 – a marginal improvement on the ratio at Monday night’s close and narrowing in on the deal ratio of 3.05, implying the market expects an agreement to be reached.
A source familiar with the matter said on Monday Glencore was told last week to offer concessions in zinc to respond to EU concerns. It has until midnight on Tuesday.
Glencore Xstrata, combined, becomes the world’s largest producer of zinc – used in metal alloys and to prevent corrosion – and the influential European steelmakers’ association, Eurofer, had already signalled the market as a point of concern.
But Brussels regulators are expected to focus on zinc metal operations in Europe.
Assets that could make the list include Glencore’s Portovesme, a lead and zinc smelter in Sardinia, and Xstrata’s Nordenham plant in Germany. Far larger, Xstrata’s San Juan de Nieva could also be put on the block.
One of the sources said San Juan would be “highly unlikely” to be top of Glencore’s list given its size – the plant produces almost 500,000 tonnes of zinc a year, more than three times the amount produced by Nordenham. Others, though, said it could be offered up to speed the regulatory process.
Selling San Juan alone would reduce Glencore Xstrata’s grip on the European zinc metal market to 28 per cent from 50 per cent.
Key for both Glencore and its regulators will be the question of who buys the assets, with some analysts arguing Brussels would have to exclude other large players in the market such as Nyrstar NV or Boliden Ltd.
Another option would be for Glencore to review its off-take deal with world No. 1 zinc producer Nyrstar. The deal was extended last year and is due to expire in 2018.
The current deadline for the European Union to either clear the merger or decide on further investigation is Nov. 8, though that is likely to be extended until around Nov. 22 if and when concessions are offered.
Xstrata shareholders are due to vote on the deal on Nov. 20.
Glencore and Xstrata declined to comment.
The EU process is not the only outstanding regulatory hurdle for Glencore and Xstrata, with China’s Ministry of Commerce also yet to deliver its verdict.