Mega merger scrutinised

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 two miners head into a $90bn all-share merger, competition watchdogs from China to South Africa, Australia and Europe will get a chance to probe into the two companies’ business, and impose conditions on an eventual union.

Many customers already see Glencore and Xstrata as one. Glencore basically controls Xstrata, and sells much of its sister company’s production.

Take thermal coal. Glencore accounts for 28% of global traded volumes, and Xstrata is the largest producer. But since mining and marketing are largely separate businesses, putting the two 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 may have room to sell more of Xstrata’s copper and zinc, where it already has 50% and 60%of the traded market. That may warrant some behavioural remedies – although these needn’t be a dealbreaker.

China’s competition arbiter allowed the merger of Russian miners Uralkali and Silvinit in July with a promise to keep supply flowing.

Two things, though, argue for closer scrutiny. First is the combined group’s size, which would be just behind Rio Tinto based on February 6 market capitalisations.

Big miners can make life uncomfortable for governments as well as buyers. Look at Australia’s planned mining tax in 2010, which was 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 the Democratic Republic of Congo, and environmental spats that generated $780 000 of fines in 2010, mean many non-government organisations will lobby watchdogs to let in some daylight.

Then there's the market’s view. By February 6, both companies had increased in value by a combined $6.5bn – compared with the $4.5bn net present value of the synergies, based on a Breakingviews analysis.

About $1bn of the difference is explained by the recent equity rally. But the thought that another $1bnmight come from increased market stature is likely to prompt a closer look. - Reuters

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

Factbox on the deal:

• Glencore, the world's largest diversified commodities trading house, will issue 2.8 new shares for each Xstrata share.
  

• That valued Xstrata shares at 1290.1 pence, based on Monday's close, for a 15.2% premium to their price last  week before talks between the two companies were announced.

• The number of Xstrata shares in issue is 2,964,692,076, of which 1,010,403,999 are held by Glencore.
  

• A further 66,257,054 Xstrata shares will be created by the exercise of options linked to deferred bonus schemes, etc, giving a total of 3,030,949,130.
  

• That fully diluted total number of shares values Xstrata at £39.1bn, based on Glencore's close at 460.75 pence on Monday and the 2.8 exchange ratio.
  

• Glencore, which has 6,922,713,511 shares in issue, will have to pay 5,657,526,366 new shares for the Xstrata shares it does not own. Those new shares were worth £26.1bn based on Monday's close.
  

• The enlarged Glencore will have around 12.6 billion shares, of which Xstrata shareholders other than Glencore will own 45%.
  

• The enlarged company will have a market value of around £58bn based on Monday's closing prices.