Don’t bet against Glenstrata antitrust roadblock

February 7, 2012

By John Foley

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

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 $90 billion 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 percent 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 percent and 60 percent 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 Feb. 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 organizations will lobby watchdogs to let in some daylight.

Then there’s the market’s view. By Feb. 6, both companies had increased in value by a combined $6.5 billion – compared with 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.

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