20120208
AFP
Raw materials giant Glencore and mining firm Xstrata announced a vast merger on Tuesday, creating a $90 billion (69 billion euro) group and heralding a new powerhouse in the global commodities industry.

The bid by Glencore, uniting the two Swiss-based groups as Glencore Xstrata International, will give birth to a company with revenues of some $209 billion and put it among the world's top mining groups, behind BHP Billiton, Vale and Rio Tinto.

"A merger between Glencore and Xstrata offers a unique opportunity to create a new business model in our industry to respond to a changing environment," Xstrata chief executive Mick Davis said in a statement.

His Glencore counterpart Ivan Glasenberg said the deal would lead to greater security of supply and a broader range of products and services for customers.

The two companies, based in Baar and Zug respectively, had been in talks over a possible deal since 2006, Glasenberg told AFP.

The new group will have a combined equity market value of $90 billion.

"With the IPO (initial public offer) in May it was easier to get a better value for Glencore. The market understood Glencore better.

"We've been talking weekly and towards November, December we landed on most of the points," Glasenberg said.

Some Xstrata shareholders, however, indicated they would vote against the merger, the Swiss news agency SDA-ATS reported.

Standard Life Investments, a substantial Xstrata shareholder, announced it would vote against it, saying it "substantially undervalues" the assets of Xstrata and its ability to generate profits in the future.

British fund manager Schroders also said it would vote against the transaction unless the terms are improved, reported the Swiss news agency.

Glencore is offering 2.8 of its shares for each Xstrata share held, representing a 15.2-percent premium over the closing share price on Wednesday, the day before Xstrata's announcement that it was in discussions with Glencore.

The deal on this basis is valued at nearly $62 billion.

The new company is expected to increase production by 11 percent annually to 2015 and have a significant presence in African copper mines as well as in Kazakhstan and South America.

Davis is to take over as head of the combined group, with Glasenberg as his deputy.

The deal will be put to a shareholder vote at the companies' forthcoming AGMs in May.

"This is not a transaction about cost reductions," said Davis.

"It's a transaction about putting together two companies ... we will operate across the whole spectrum and in that way, build synergies by putting Xstrata's production through the Glencore marketing system."

Ratings agency Moody's responded to the merger announcement by placing the ratings of both companies on review for a possible upgrade given a favourable assessment in terms of diversification and synergies.

"The merger will increase the diversification of both companies, with Glencore achieving stronger control over the high-quality mining resources of its currently 34 percent-owned associate Xstrata, and the latter gaining full access to the trading and logistic platform of Glencore," it said.

Shares in both companies fell, with Glencore dropping 3.8 percent to close at 443.25 pence per share and Xstrata falling 4.9 percent to 1,200 pence as investors took profits on formal news of the deal.

In the 12 months to December, Glencore reported $186.2 billion in sales and had core earnings before exceptional items of $6.5 billion.

Xstrata had sales of $33.9 billion over the same period and core earnings of $11.7 billion.

In addition to being a giant trading company, Glencore also holds major mining assets in key minerals such as zinc, copper, lead and aluminum.

The company also has interests in energy (oil and coal) and agricultural products including cotton, sunflower, wheat and sugar.