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Glencore, Xstrata Seal Deal in 2 Months After Years of Talks

Glencore, Xstrata Seal Deal
A Glencore International Plc prospectus in Hong Kong, China. Photographer: Jerome Favre/Bloomberg

Glencore International Plc’s planned $39 billion takeover of Xstrata Plc, a combination years in the making, came together in just two months after a pivotal dinner in London last year between Xstrata Chief Executive Officer Mick Davis and Glencore’s Ivan Glasenberg.

The two executives met at a hotel in London’s West End in early December to iron out the basis for talks that would fuse their enterprises, according to people familiar with the matter, who declined to be identified because the talks were private. After reaching an agreement, they then brought in 18 advisers from half a dozen banks to hammer out the details of the all-share “merger of equals” announced yesterday.

Glencore, which already holds 34 percent of the Zug, Switzerland-based mining company, offered 2.8 of its shares for every Xstrata share, valuing the rest of Xstrata at 24.3 billion pounds ($39 billion) at yesterday’s close in the largest mining takeover ever.

The companies spent about six to seven years laying the groundwork for the deal, Xstrata CEO Davis, who will lead the combined company, said yesterday at a press conference. Negotiations, however, only gathered steam following Glencore’s $10 billion IPO in May, from which point the executives spoke “every few weeks,” CEO Glasenberg said in an interview.

Glencore’s offering expedited the talks because it gave Xstrata shareholders an idea of how to value the commodities trader, a crucial step before trying to strike a non-cash transaction. The share sale, which valued Glencore at $59 billion, also gave the commodities trader the firepower necessary to carry out the takeover.

Klein Negotiates

By that point, the two companies had brought in Michael Klein, the former vice chairman of Citigroup Inc. who struck out on his own in 2008, to act as a broker between Davis and Glasenberg. Throughout most of the negotiations, Klein played an important role relaying the two CEOs’ demands and helping them come to terms, according to people with knowledge of the talks. Klein was listed on the merger announcement as a strategic consultant to both companies.

The merger plans went by the codename “Everest.” Xstrata Chairman John Bond and his Glencore counterpart Simon Murray, both mountaineers, made a trip to Everest a few years before, when they were both on the board of Vodafone Group Plc.

A spokesman for Baar, Switzerland-based Glencore declined to comment, and an Xstrata spokeswoman wasn’t available. Glencore climbed 0.4 percent to HK$56.70 at 11:57 a.m. in Hong Kong after dropping 3.8 percent in London yesterday. Xstrata declined 4.9 percent in London yesterday.

The Next Step

By late last year, Davis, 53, and Glasenberg, 55, were ready to take the next step, and began planning the merger in earnest, the people said. When Bloomberg broke the news of the talks on Feb. 2, Glasenberg was at a conference in Moscow. Xstrata’s board was set to meet that same day and Glencore’s on Feb. 3, as the final details were being hashed out for the deal to create a company to rival BHP Billiton Ltd.

That agreement, which includes giving Davis the role of CEO and making Glasenberg his deputy, reunites two men who first crossed paths more than 30 years ago at South Africa’s University of the Witwatersrand, where Davis taught and Glasenberg received an accounting degree.

Glasenberg later joined the commodities trader Marc Rich & Co., which was renamed Glencore in 1994 after a management buyout. By then, the company had acquired a stake in Sudelektra AG, a Swiss infrastructure investment company that was renamed Xstrata in 1999.

Joining Xstrata

Davis, who had helped orchestrate the merger of BHP with Billiton Plc in 2001, left the combined company to become CEO of Xstrata months later. Xstrata listed on the London Stock Exchange the following year, at the same time acquiring the Australian and South African coal assets of Glencore, still its largest shareholder.

As partners, Davis and Glasenberg will now have to convince shareholders of the merits of the deal and the price, which has some investors balking. Garnering their support may yet draw out the final stretches of a deal almost a decade in the making.

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