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Xstrata, Glencore agree to terms on merger

In this April 14, 2011 file picture the Glencore headquarters in Baar, Switzerland is photographed. Mining company Xstrata PLC confirmed Thursday Feb. 2, 2012 that it is in merger discussions with commodities trader.

Urs Flueeler/Urs Flueeler/AP

Glencore International and Xstrata, the owner of Canada's Falconbridge, agreed to a merger that would create a global mining giant with a market value of $90-billion (U.S.), allowing it to compete with industry heavyweights such as BHP Billiton and Rio Tinto for the top mining developments and takeovers.

The deal joins Glencore, the world's biggest commodities trader, with one of the biggest producers of thermal coal, copper, zinc and nickel. The merger has been expected for some time. Glencore already owns 34 per cent of Xstrata and has wanted to buy the rest since Glencore's initial public offering in London last spring.

In a joint statement, the two Swiss-based companies, said that Glencore is offering 2.8 new shares for each Xstrata share in an all-share "merger of equals."

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Even though Glencore shareholders will emerge as the dominant owners of combined entity, Xstrata CEO Mick Davis is to become CEO of the new group, to be called Glencore Xstrata International PLC. Ivan Glasenberg, the South African-born accountant who has led Glencore since 2002, is to become deputy CEO and president. Sir John Bond, Xstrata's chairman, is to become chairman of the new company.

Xstrata's executive control of Glencore Xstrata reflects the nature of the new company. About 83 per cent of combined revenues will come from mining, the rest from trading, marketing and logistics.

The merger values each Xstrata share at 1,290.10 pence, giving Xstrata a value of £39.1-billion. The price represents a premium of 15.2 per cent to Xstrata's share price on Feb. 1 and a 27.9-per-cent premium to the average over the previous three months.

Glencore had hoped for a no-premium merger, but Mr. Davis held out for a price that would reflect Xstrata's strong growth, especially in copper, and the cost savings of putting the companies together. The companies put the estimated cost synergies at $500-million a year, though some analysts put the figure higher.

"Increased scale and diversity will improve our risk profile, enhance access to capital markets and allow us to participate in industry consolidation," Mr. Davis said in a statement released Tuesday morning. "With access to superior market intelligence, relationships with thousands of suppliers and customers and the sustainability and operating expertise to operate in both existing and emerging producing regions, Glencore Xstrata will be well placed to build a distinct competitive position and capture new opportunities across the globe."

Mr. Davis and Mr. Glasenberg are considered among the most aggressive executives in the mining and trading industries. Analysts expect the new company to move quickly on the mergers and acquisitions front and not shy away from big-name targets. In 2009, Xstrata tried to buy Anglo American, one of the world's largest producers of base metals and diamonds. The offer was rebuffed, though it's an open secret that Mr. Davis and Mr. Glasenberg still covet the company.

TD Securities thinks First Quantum Minerals, a copper and nickel producer, would become an alluring target for the new company. First Quantum already shares the Mopani copper project with Glencore in Zambia. Its Haquira copper project in Peru is adjacent to a big Xstrata copper project.

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Other companies that might interest the new company are Fortescue Metals Group, an Australian iron ore company, and any of the publicly traded mining companies that are making a splash in Russia and the other former Soviet Republics. Copper giant Freeport might also be a takeover candidate. But with a market value of $44-billion, it might be too big.

Together, Xstrata and Glencore said they would be the world's fourth largest diversified natural resources company (after BHP, Brazil's Vale, owner of Canada's Inco, and Rio Tinto), and be the global leader in exported thermal coal, ferrochrome and integrated zinc production. The new company would be the third largest producer of copper and fourth largest producer of nickel. With 101 mines and 50 metallurgical facilities in 33 countries, the new company will be a truly global player.

European Union antitrust regulators are not expected to challenge the merger. Since Glencore currently owns 34 per cent of Xstrata, the EU already treats the two companies as a single entity. But regulators in Australia, China, South Korea and Japan are expected to take a hard look at the merger, given its dominance in the production and trading of certain crucial commodities, such as coal.

Glencore was founded in 1974 by Marc Rich, the notorious trader who later became one of America's most wanted fugitives. He was pardoned by Bill Clinton on the former president's last day in office. The trading shop was bought out by its management team, including Mr. Glasenberg, in 1994. Mr. Rich, who lives in Switzerland, has no relationship with Glencore.

Glencore employes 2,800 people in marketing offices in 40 countries and has a fleet of more than 200 ships, which are used to deliver commodities around the globe.

Xstrata was spun out of Glencore more than a decade ago. Under Mr. Davis, who became CEO in 2001, it has become one of the fastest growing mining companies. He has taken it from a market value of $500-million to $58-billion.

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Approval for the merger would create a company with 2012 sales of $209-billion, Glencore and Xstrata said.

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