Glencore-Xstrata Bankers May Reap Up to $140 Million for Advice

Prodeco Group's Calenturitas coal mine, owned by Glencore International AG. Source: Glencore International AG via Bloomberg

Six investment banks are set to reap total fees of as much as $140 million for advising on commodity trader Glencore International Plc’s proposed merger with Xstrata Plc, in what would be the mining industry’s largest deal.

Xstrata, which said today that Glencore had approached it regarding an all-share transaction, is working with Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Nomura International Plc, while Glencore has tapped Citigroup Inc. and Morgan Stanley.

Combined, Glencore and Xstrata may be valued at about 52 billion pounds ($82 billion), and the deal could signal a turnaround in mergers and acquisitions activity. The value of global takeovers dropped to the lowest level in more than a year in the fourth quarter, with deals slumping 14 percent from the previous three months to $473 billion, according to data compiled by Bloomberg.

“There is pent-up demand for strategic deals, cash on balance sheets and strategic initiatives that need M&A in order to be implemented,” said Scott Moeller, a professor at Cass Business School in London. “Boards are finally realizing that it’s better to do a deal in a market trough on an upswing than at the peak on a downswing.”

In addition to seeing their names on a highly visible deal, banks advising Glencore and Xstrata can expect multimillion-dollar payouts for their work. The banks may earn an estimated $50 million to $70 million on either side of the deal, or as much as $140 million in total, according to data from New York-based researcher Freeman Consulting Services.

Commanding a Premium

“The bulge-bracket firms are going to command premium pricing and I see no evidence of that changing,” Moeller said.

Depending on the exact value of Xstrata shares, Glencore’s all-share swap for the miner’s stock may match or exceed the size of the largest mining deal so far: Rio Tinto Plc’s $38 billion takeover of Canada’s Alcan Inc. in 2007.

While six investment banks are presently said to be advising on the deal, others may be added before the transaction is completed. Glencore and Xstrata’s combined valuation excludes the commodity trader’s existing 11 billion-pound stake in the miner.

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