Xstrata confirms Glencore merger approach

[February 02, 2012]  LONDON (AP) -- Mining company Xstrata PLC confirmed Thursday that it is in merger discussions with commodities trader Glencore International PLC, a deal that would create an industry behemoth with around $175 billion worth of revenues.

In a statement in response to mounting speculation that the two were in talks, Xstrata said that Glencore had proposed an all-share merger of equals. Glencore said it had taken note of the announcement, but cautioned that there was no certainty of an offer being made.

Despite that caveat, shares in Xstrata rose by 10.9 percent to 12.42 pounds ($19.65) while Glencore's were up 6.2 percent at 4.59 pounds. As a result of Thursday's share price movements, a combined company would have a market capitalization of over $100 billion, putting it ahead of Rio Tinto PLC but short of Brazilian miner Vale SA and BHP Billiton PLC.

Glencore, which already holds more than a third of the shares in Xstrata, has until March 1 to announce whether it intends to make a firm offer. This is the first time there has been public confirmation of formal merger talks, but background discussions have been ongoing for some years.

In a rare interview ahead of Glencore's $10 billion IPO last year, CEO Ivan Glasenberg told the Financial Times that there were "a lot of benefits and synergies" to be gained from merging with Xstrata.

Analysts noted that its IPO has given Glencore the capital to finally make a big acquisition such as Xstrata, which could boost its fortunes in the high-turnover, low-margin commodities business.

"Strategically this is a marriage made in heaven," said Louise Cooper, a markets analyst at BGC Partners in London. "It would create a dominate commodities miner and trader in an industry where being large constitutes a huge competitive advantage."

Xstrata, based in Switzerland and the U.K., was formed in 2002 when it bought Glencore's coal assets. The company mines copper in the Americas, zinc in Spain and ferrochrome and vanadium in Australia and South Africa.

Glencore extracts, ships and refines raw materials from coal, to copper, to corn. It is based in the Swiss town of Baar but has its main listing in London.

Glencore was founded in 1974 by Marc Rich, the fugitive trader who was controversially pardoned in 2001 by then United States President Bill Clinton just hours before he left office. Rich sold the company to its employees in 1994, and the firm has been at pains to distance itself from its founder and any whiff of improper activity, though environmental groups have since targeted the company for its mining interests.

On Tuesday, Xstrata reported that coal production rose 7 percent last year but copper production declined by 3 percent as deposits are nearing exhaustion. Copper accounts for 44 percent of Xstrata earnings and coal for 27 percent.

[Associated Press; By ROBERT BARR and FRANK JORDANS]

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