Glencore-Xstrata would be big, and perhaps better

February 3, 2012

By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own

A merger of Glencore and Xstrata might sound like a natural. The two companies are about the same size, are in roughly the same businesses and have an equity tie – the Swiss-headquartered trader-miner Glencore owns 34 percent of the Swiss-headquartered miner Xstrata. They both have outspoken and ambitious South African chief executives, Ivan Glasenberg at Glencore and Mick Davis at Xstrata.

There is also some real industrial logic. Glencore’s mines would have added 25 percent to Xstrata’s operating profit in the first half of 2011. The extra bulk might push the combined company firmly into the top league of global miners, along with BHP Billiton, Rio Tinto and Vale. Scale helps in mining: the existing three big global players can more easily afford to take on the risks that come with huge investment projects. Second-tier companies can end up fighting over second-rate assets.

Trading, Glencore’s traditional business, would account for about 20 per cent of the combination’s operating profits. It could benefit from the additional supply of raw materials provided by Xstrata, and in turn offer its market insights to a broader mining operation.

Still, the case for a divorce – the sale of Glencore’s 34 percent holding of Xstrata – might be as strong as the case for marriage. To start, even if executive roles can be agreed to get a deal done, it will be hard to keep Davis and Glasenberg under one corporate roof – and a shame to lose either of them.

There could also be a clash of businesses cultures. Investing in mines requires long-term thinking about many things – politics and the environment as well as geology and prices. Logistics and trading require just as much intelligence, but the timescale is shorter and the mindset is quite different. Few companies have managed to combine the two successfully.

In 2009, Xstrata proposed a different merger of equals, with Anglo American. That combination, rejected by Anglo, would have created a bigger miner than the one currently under consideration, and would probably have raised fewer cultural challenges. If Davis didn’t already have Glencore as Xstrata’s biggest shareholder, it’s not obvious he would be so open to its overture.

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