The two companies have plenty in common: while Xstrata is the world’s largest exporter of thermal coal, Glencore is its leading trader. They’re both similarly-sized: Glencore has a market value of £31bn (admittedly lower than its £36.5bn valuation when it floated in May last year), while Xstrata’s market cap is £37m. And Glencore already owns a 34.5% stake in the mining firm. So a merger would value the pair at somewhere in the region of £50bn.
Why hasn’t it happened before? Ivan Glasenberg, Glencore’s chief exec, has made no secret of the fact that he’s keen on the idea. In an interview with the FT last year, he said that ‘there are a lot of benefits and synergies to put the two companies together’. But his counterpart at Xstrata, Mick Davies, was less keen, arguing that valuing Glencore was difficult. The commodities trader’s IPO, though, put a firm value on it, paving the way for talks.
But analysts have pointed out that nothing’s set in stone yet. Under UK takeover rules, Glencore has until March 1 to make an offer. Before then, a number of creases need to be ironed out. For a start, competition rules, which could object to the coming together of two companies so pivotal in the export and trading of thermal coal (although for antitrust purposes, EU regulators already consider the two companies a single entity, so it would just be authorities in China and Australia they would have to placate). Secondly, Xstrata’s investors may take issue with the idea of a merger, rather than an acquisition, demanding a takeover premium from Glencore.
If the merger does take place, expect a massive shakeup in the industry as rivals race to sign similar deals so they can gain market share. We’ll have to wait another month until anything’s confirmed but moves are clearly afoot. And with Facebook’s $5bn-plus IPO under way well, life on the equity markets could be about to get exciting...