Glencore’s tie-up with Xstrata may not harm competition. But, that won’t stop regulators from trying to wrap it up in red tape for several months. As the miners head into a $90-billion all-share merger, competition watchdogs from China to South Africa, Australia and Europe, will get a chance to probe companies’ business and impose conditions on a union.
Many customers already see Glencore and Xstrata as one. Glencore controls Xstrata and sells much of its sister firm’s production. Take thermal coal. Glencore accounts for 28 per cent of global traded volumes and Xstrata is the largest producer. But, since mining and marketing are separate businesses, putting those together shouldn’t change the market. The European Commission took that view when it passed Xstrata’s takeover of Falconbridge in 2006.
That’s not true across the board. Glencore could sell more of Xstrata’s copper and zinc, where it has 50 per cent and 60 per cent of the traded market. That may warrant behavioural remedies — although these needn’t be a dealbreaker. China’s competition arbiter allowed the merger of Russia’s Uralkali and Silvinit with a promise to keep supply flowing.
Two things, though, argue for closer scrutiny. First, the combined group’s size, which would be just behind Rio Tinto, based on February 6 m-caps. Big miners can make life uncomfortable for governments, as well as buyers. Look at Australia’s planned mining tax in 2010, watered down after miners, including Xstrata, threatened to pull investment.
Glencore is also an irresistible target, thanks to decades of operational secrecy. Digging in controversial places like Congo and environmental spats that generated $780,000 of fines in 2010 mean many non-government organizations will lobby watchdogs to let in some daylight.
Then, there’s the market view. By February 6, both companies had risen in value by a combined $6.5 billion, compared to the $4.5-billion net present value of the synergies, based on a Breakingviews analysis. About $1 billion of the difference is explained by the recent equity rally. But, the thought that another $1 billion might come from increased market stature is likely to prompt a closer look.
