Glencore Said to Be Near Agreement to Combine With Xstrata

Glencore International Plc is nearing an agreement to combine with Xstrata Plc (XTA), adding mines from Africa to Asia to the world’s largest listed commodity trader, said two people with knowledge of the plan.

The two Switzerland-based companies may announce a deal as early as this week, said the people, who declined to be identified because the plans are confidential. The combined company may be valued at 52 billion pounds ($82 billion) after excluding Glencore’s 34 percent stake in Xstrata.

Joining Zug-based Xstrata with Glencore, located two miles away in Baar, would reunite two groups which separated a decade ago when Xstrata bought Glencore’s Australian and South African assets for $2.5 billion and went public in London. A deal may generate savings of as much as $704 million, Credit Suisse Group AG said in a report in October.

“Combining gives them that much more scale to compete against some of the bigger players,” including BHP Billiton Ltd. and Rio Tinto Group, Cameron Peacock, a Melbourne-based market analyst at IG Markets Ltd. said today by phone.

Glencore shares gained 5.1 percent to HK$53.25 at 11:47 a.m. local time in Hong Kong. Simon Buerk, a spokesman for Glencore, and Alison Flynn, a spokeswoman for Xstrata, declined to comment.

Glasenberg, Davis

Combining the companies would connect Glencore Chief Executive Officer Ivan Glasenberg, 55, with his Xstrata counterpart Mick Davis, 53. Glasenberg, a former coal trader who led the company to a $10 billion initial public offering in May, said in August the commodities trader is “aggressively” seeking mergers and acquisitions as market valuations slide.

The group would report net income of about $11.2 billion in 2012 and Glencore would control about 65 percent of a merged company, assuming a merger with no premium attached, Credit Suisse said in October.

The talks between Xstrata and Glencore are ongoing and an agreement could still fall apart, one of the people said. Glencore was studying a merger with Xstrata to gain more access to financing, two people familiar with the matter said in May 2010, 12 months before Glencore’s IPO.

Mining takeovers are accelerating as companies struggle to replace aging deposits and China’s industrial growth stokes metals demand for construction, cars and appliances. Global mining deals swelled to $98 billion last year, the highest level since 2007, from $75.8 billion in 2010, according to data compiled by Bloomberg.

Anglo Offer

A deal would be the biggest for Xstrata since it ended a 29.2 billion-pound offer for London-based Anglo American Plc in October 2009 after Anglo’s board snubbed the approach. BHP withdrew from a $66 billion offer for Rio Tinto in 2008.

“There’s really nothing technically that should be preventing large-scale M&A activity,” Daniel Rohr, an analyst at Morningstar Investment Services Inc. in Chicago, said by telephone yesterday. “Balance sheets across the industry are in rather rude health and large miners have massive cash balances that seem to grow larger with each passing quarter.”

Xstrata, which also mines metals including copper and nickel, produced 85.3 million metric tons of coal last year.

Its first-half profit climbed 27 percent after commodity prices advanced, it said in August. It had $1.4 billion in cash and near cash as of June 30, and signed a $6 billion credit line in October to renew outstanding facilities, according to data compiled by Bloomberg.

Glencore Profit

Glencore, which owns mines, plants and warehouses, had a first-half profit of $2.5 billion, up 68 percent on a year earlier. It may post adjusted net income of $4.4 billion for 2011, according to the average estimate of 15 analysts surveyed by Bloomberg.

Metal prices have declined 13 percent in the past year and mining companies have dropped 12 percent in the same period, according to data compiled by Bloomberg.

Xstrata previously bought Australia’s Jubilee Mines NL for A$3.1 billion ($3.3 billion) in 2008, and Colombia’s Prodeco coal assets for $2 billion in 2009.

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Brett Foley in London at bfoley8@bloomberg.net

To contact the editors responsible for this story: John Viljoen at jviljoen@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net; Rebecca Keenan at rkeenan5@bloomberg.net

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