Anglo-Swiss mining group Xstrata PLC announced plans Tuesday to merge with commodities trading giant Glencore International PLC in a deal that will create the world's fourth-largest natural-resources group.
The combined company, to be called Glencore Xstrata with a combined market value of US$90 billion, will control a chain of businesses from mining to refining, storage and shipping of basic commodities like coal, copper and corn.
The new group would be the world's largest producer of thermal coal - which is used to fire power stations - as well as becoming a major a force in the mining and production of copper, used in electronic cables, and other metals including ferrochrome, a key ingredient in the production of stainless steel.
The announcement of the terms of the deal comes just a few days after the first public acknowledgment that the two companies were in talks about a long-mooted tie-up - merger talks, code-named 'Everest', have gone on for years.
Xstrata, based in Zug, Switzerland, 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 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 trader who was controversially pardoned on tax-evasion charges in 2001 by then US President Bill Clinton just hours before he left office. Rich sold the company to its employees in 1994, and the company has been at pains to distance itself from its founder. Environmental groups, however, have since targeted the company for its mining interests.
However, even though the deal is likely to win the day - Glencore already owns 34 per cent of Xstrata - leading shareholders were already beginning to criticise the terms of the all-share deal.
Under the terms of the merger agreement, Xstrata shareholders would receive 2.8 Glencore shares for each of their shares. That represents a premium of 15.2 per cent based on Monday's closing prices.
The merger is projected to yield cost savings of US$500 million in the first full year, primarily in marketing, while creating the world's fourth largest global diversified natural-resource company, with operations in 33 countries.
It will also give the combined company greater leverage to borrow money for its operations, a key advantage in the high-volume, low-margin commodities business.
"The commodities value chain is becoming longer and more complex, creating opportunities for a company that can pre-emptively participate at every stage," said Xstrata Chief Executive Mick Davis, who will become CEO of the merged company.
"Glencore Xstrata would be well positioned to do just that, creating value from resource extraction to customer sales and services, at a time when demand for our combined products continues to grow," Davis said.
Davis told a conference call that he expects the merger to complete in the second half of this year, assuming regulators give the deal the all-clear.
Glencore CEO Ivan Glasenberg, who will take the titles of deputy CEO and president, said the merger represents "a fantastic opportunity to create a new powerhouse in the global commodities industry."
Xstrata shares were down 2.6 per cent at 1,228 pence in midday trading in London; Glencore shares were down 0.8 per cent at 457 pence.
The movements in the share prices indicate some disappointment in the markets that the premium being offered isn't as high as some had hoped.
David Cumming, head of equities of Standard Life Investments, which owns a little more than two per cent of Xstrata stock, has criticised the deal for undervaluing the mining company's assets and potential. "Consequently, it is our intention to vote against the deal unless the merger terms for Xstrata shareholders are materially improved."
Schroder Investment Management, which owns around 0.7 per cent of Xstrata, also said the terms undervalued the company and that it was a poor deal for the majority of shareholders.
The merger agreement was announced as Xstrata reported a 22 per cent gain in full-year profit to US$5.7 billion, compared to US$4.7 billion a year earlier. Revenue was up 11 per cent to US$33.9 billion.