Glencore-Xstrata Merger Faces Zinc Hurdle, Jefferies Group Says

Glencore International Plc’s 21.2 billion-pound ($34 billion) bid for Xstrata Plc may face regulatory hurdles on concern a merger would give the companies unfair advantages in the zinc market, Jefferies Group Inc. said.

Xstrata could be forced to sell its San Juan de Nieva zinc smelter in Spain to win European Commission approval for a tie-up, Christopher LaFemina, an analyst at Jefferies in New York, said today in a note. Without “structural remedies,” the combination may lead to “significant concerns regarding anti-competitive conditions,” he said.

Glencore, the Baar, Switzerland-based commodity trader that already owns 34 percent of Xstrata, agreed on Feb. 7 to offer 2.8 of its shares for each one in the target company. The transaction, which would create the world’s biggest zinc producer and the fourth-largest miner, needs to be assessed by regulators in Europe, China, South Africa and Australia.

When Xstrata acquired Canadian nickel producer Falconbridge Ltd. in 2006, the European Commission considered Europe’s zinc operations as a market in itself rather than a global market. On this occasion, it will probably consider Xstrata’s metal output and supplies from Glencore’s third-party trading business as one, signaling that the merged entity would control 50 percent of the zinc market in the European Economic Area, LaFemina said.

Smelter Sale

“The appropriate structural remedy would be for Xstrata to sell its 489,000-ton-per-annum San Juan de Nieva zinc smelter,” the analyst said. The companies’ market control would then fall to 28 percent, he said.

A combined Glencore-Xstrata would also be the world’s third-biggest producer of mined copper and the largest exporter of thermal coal. European steel group Eurofer said last month it was concerned the takeover would harm competition in the zinc, nickel and coal markets.

Glencore said on Feb. 24 it would file for competition approval with the European Commission. To succeed in merging with Xstrata, it will also need to increase its offer to 3 of its shares for each one in Xstrata to win shareholder approval, according to Jefferies. Glencore has faced calls from Xstrata investors including Schroders Plc, Fidelity Worldwide Investment and Standard Life Plc to raise its bid.

“Due to the importance of this transaction for both companies, we expect Glencore to ultimately bump its offer from 2.8 to 3.0,” LaFemina said.

Investors holding 16.48 percent of Xstrata can succeed in voting to block the deal. That’s because the U.K. takeover code prevents Glencore from voting its stake in Xstrata, putting the final decision into the hands of the shareholders who control the rest of the company.

BlackRock Inc. fund manager Catherine Raw, who helps manage the firm’s $14 billion World Mining Fund, said yesterday she supports the merger. BlackRock is the largest shareholder in Xstrata after Glencore, with about 6 percent, and holds about 1.6 percent of Glencore.

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