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Glencore may offer $40 bn to win Xstrata

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Bloomberg Hong Kong/ London
Last Updated : Jan 21 2013 | 2:06 AM IST

Glencore International Plc, the commodities trader in talks to combine with Xstrata Plc, may need to offer as many as three of its shares for each one in the coal and copper producer to strike a deal.

Glencore, which already holds 34 per cent of Zug, Switzerland-based Xstrata, may offer as much £25.3 billion ($40 billion) of its stock for the rest. That’s based on the companies’ London close on February 1, the day before Xstrata disclosed the approach, and the 23 per cent average premium paid in 2011 mining deals, according to data compiled by Bloomberg. An Xstrata share is currently valued at about 2.66 in Glencore.

A Glencore-Xstrata combination would create an $82-billion rival to BHP Billiton Ltd in the industry’s largest deal. It would be the world’s biggest producer of zinc, lead and thermal coal and a top-five producer of copper and nickel, according to UBS AG. Glencore may generate $1 billion in savings from the deal, allowing it to pay a 20 per cent premium, based on share prices prior to February 1, UBS said on Friday.

“The current ratio implies a 14 per cent premium, but whether this is palatable for Xstrata shareholders remains to be seen,” London-based Liberum analysts said in a report.

“Our sense is that the current ratio appears about correct and we believe that a deal could be struck in the 2.7 to 2.8 range.”

Still, under a so-called merger of equals where both sets of shareholders end up controlling 50 per cent of the combined group, Glencore would need to offer 3.63 of its shares for each of Xstrata’s, Exane BNP Paribas analyst Sylvain Brunet said in a report on Friday.

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‘Nil premium?’
“A nil premium merger would make no sense for Xstrata’s shareholders, given the limited synergies involved,” Paris-based Brunet said. A 39 per cent premium would need to be offered to result in equal ownership, he said. “We believe that a share deal with Xstrata would require a hefty premium.”

A merger would give Glencore coal, copper and nickel mines from Africa to Asia. Glencore, located two miles away from Xstrata in Baar, is required to announce a firm intention to make an offer by 5 pm on March 1 under UK takeover rules, Xstrata said yesterday.

Xstrata surged 9.9 per cent yesterday and rose 0.6 per cent to 1,238 pence at 11.27 am in London, valuing it at £36.7 billion. Glencore advanced 0.6 per cent to 464.55 pence at the same time.

‘Deal-breaker’
“The deal has to be initiated by Glencore and the premium paid would have to be one that Xstrata’s shareholders cannot refuse,” BNP Paribas’ Brunet said. “Any premium greater than 30 per cent to yesterday’s close would leave Glencore below the control level; this might prove a deal-breaker.”

Mining takeovers are accelerating as companies struggle to replace depleting deposits and China’s industrial growth stokes metals demand for construction, cars and appliances. Glencore made an approach regarding an all-share merger of equals, Xstrata said yesterday. Glencore said there’s no certainty of an offer.

Global mining deals swelled to $98 billion last year, the highest level since 2007, from $76 billion in 2010, according to data compiled by Bloomberg. The average ratio of Glencore to Xstrata shares was 2.44 in the six months before this week’s announcement, according to data compiled by Bloomberg.

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First Published: Feb 04 2012 | 12:50 AM IST

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