Competition authorities are expected to cast a steely eye over the $90-billion new resources “super major”, Glencore Xstrata.
The merger of $50-billion commodities trading giant Glencore and the $59-billion megaminer Xstrata, announced on Tuesday, will create the world’s number one producer of export thermal coal and zinc. But the parties face possible headwinds while they try to convince regulators in the United States, the European Union, China and South Africa that there is room for this giant.
By its own estimates, the combined company’s joint revenue would be about $209-billion, which analysts have pointed out is almost double South Africa’s national budget of $132-billion. The merged entity would leap up the rankings of the world’s top 10 mining companies, falling just behind fellow behemoths BHP Billiton (a market cap of about $205-billion), Vale ($135-billion) and Rio Tinto ($123-billion). The new super-miner would also become the only major that operates at every level of the supply chain for a host of critical commodities.
At the announcement of the deal this week, Xstrata chief executive Mick Davis was confident that the necessary regulatory permission would be wrapped up by the third quarter of the year. “We don’t have any concerns,” said Davis, pointing out that the European Union had in the past treated the two companies as one unit.
But the South African competition authorities could prove difficult, resulting in delays. They are known for taking a tough stance as far as market dominance is concerned. The marriage of US retail conglomerate Walmart and the local Massmart is a prime example of how a merger can drag on for more than a year.
Peter Leon, the head of Africa mining and energy at law firm Webber Wentzel, thought the merger was unlikely to hit problems in South Africa because the companies were essentially different businesses, which was what they were likely to argue before the competition authorities. They may, however, face tougher scrutiny in other jurisdictions such as the EU, China and possibly Australia, he said. Dominance of 35% of a product market was the starting point that jurisdictions such as the EU used when examining this sort of deal.
The merger would formally unite Glencore’s extensive global trading and marketing business with Xstrata’s diverse production assets, making it active at every level of the supply chain, from mining production and logistics to marketing and trading.
Glencore, which already owns 37% of Xstrata, has a number of its own mining assets, but its major strength is as a commodities trader. This integration was a major selling point for Davis when he pitched the merger formally after the announcement of the company’s preliminary results this week. “Glencore Xstrata will be the only company of significant size operating at every level of that value chain,” he said.
This was echoed by Glencore chief executive Ivan Glasenberg. “We get the flow of the Xstrata tonnes into the Glencore [marketing and trading] system,” he said.
The merger offered improved arbitrage opportunities, he noted. Glencore employs three key arbitrage strategies, taking advantage of the price differences for the commodities across geographies, product types and times.
The new structures
The new entity, Glencore Xstrata, will be headed by Davis, with Glasenberg as deputy chief executive. Glencore executives will take over the marketing operations and Xstrata business-unit executives will be in charge of industrial production.
The combined company will have an 11% share of the world’s thermal coal market, 12% of mined zinc and 8.5% of copper markets, according to research by financial services company UBS. Although the volumes of certain commodities were not expected to cause problems in the different jurisdictions, Davis said they had triggered filing requirements.
Simon Roberts, chief economist at the Competition Commission, said the South African authorities would assess the case based on the companies’ local assets. Analysts estimate that Xstrata has assets worth R26-billion and Glencore about R6-billion. Roberts could not discuss the merits of the merger or whether there would be opposition to it.
“It’s difficult to give time frames, because it will depend on the information they present to us. We would need to evaluate what the effects would be on the South African economy and whether it would result in a high concentration of certain local assets,” he said.
“We could, for example, attach conditions to the South African assets, but it’s premature to make a call now.”
Roberts said the competition process would happen simultaneously across all the jurisdictions in which Glencore and Xstrata operated and the local authorities could consult with their international peers on the matter. One of the factors that could hold up the approval process in South Africa is the fact that the competition authorities are still evaluating Glencore’s increased stake in Shanduka’s Optimum Coal.
BHP Billiton president Xolani Mkhwanazi did not expect any competition hurdles for the two companies, given Glencore’s role as a trader and Xstrata’s as a miner.
“In any case, Glencore already has 37% of Xstrata, so this is merely a consolidation,” he said.
BHP Billiton was not too worried about the additional competition. “We will leave it to the market to decide who remains the largest,” said Mkhwanazi.
Hein Boegman, a director at PriceWaterhouseCoopers in South Africa, regarded the merger as “vertical integration” of the industry.
“The reality is a consolidation is happening. Following the financial crisis, the junior and mid-tier companies’ balance sheets are struggling. This will give the merged entity many opportunities to snap up these smaller assets and grow its base.”
Eye on a bigger prize
The sheer scale and potential market power of the merged entity has stoked speculation that a renewed bid for fellow giant Anglo American could be on the cards.
Cadiz mining analyst Peter Major argued that the chance of a take-over bid by the merged entity for Anglo American, which has a market cap of about $60-billion, was better than ever. During the height of the 2008 financial crisis, when Xstrata was saddled with high debt levels and the shares of both companies were in the doldrums, Xstrata’s proposed share-for-share “merger of equals” with Anglo failed outright.
Since then, share prices have recovered, Xstrata’s debt levels have come down and the outlook for commodities has improved.
A merger with the new combined company could prove far more attractive to Anglo American shareholders and Glencore Xstrata could afford to offer a premium on Anglo’s share price, said Major.
With regard to the appraisal of the merger by competition authorities, much would depend on the level of market share the combined company would have across the various minerals sectors, Major said.
A complete sanction was unlikely to be a real threat if its dominance of the product market did not reach the 30% mark.
Food-aid money lands in trader’s coffers
More than £50-million of World Food Programme aid to feed the starving has ended up in the hands of a London-listed commodities trader run by billionaires, despite a pledge by the United Nations agency to buy food from “very poor farmers”.
Glencore International, which buys up supplies from farmers and sells them on at a profit, was the biggest single supplier of wheat to the World Food Programme over the past eight months, the Guardian can reveal. Glencore, which was able to operate with secrecy from its base in Baar, Switzerland, until it floated on the London Stock Exchange last May, has announced a merger with mining group Xstrata to become one of the 10 biggest FTSE 100 companies with a market value of more than $90-billion.
Details of the dealings with Glencore, which controls 8% of the global wheat market, emerged a year after the head of the food programme committed to buying food from local farmers.
“When we can, we purchase our food from very poor farmers who suffer because they are not connected to local markets,” Josette Sheeran, the programme’s executive director, told China’s state news agency.”
Raj Patel, the author of Stuffed and Starved: Markets, Power and the Hidden Battle for the World’s Food System, said it was shocking how much food-aid money was “funnelling to one of the largest commodity traders. That financial entities are now making their presence felt points to the increasing financialisation of food in the 21st century.”
The rising price of wheat has squeezed the incomes of millions. Many have been forced to turn to the food programme, which last year fed more than 90-million people in 73 countries. Over the past eight months Glencore has sold wheat worth £50-million to the food programme. In the biggest single deal the programme bought $22.5-million of Glencore wheat in July last year to feed Ethiopians.
In its latest half-year financial results, Glencore, which has attracted controversy for environmental breaches and accusations of dealing with rogue states, including Iraq, reported “increased geographic arbitrage opportunities [buying commodities cheaper in order to sell them on later at a higher price] available in wheat and edible oils”. — Rupert Neate,