Editorial: Glencore moves on Xstrata

February kicked off with news of a mega merger the likes of which have not been seen since before the 2008 global financial crisis and the ensuing nosedive in commodities prices.

Zug, Switzerland-based metals trader Glencore International is proposing to take over its 34%-owned mining subsidiary Xstrata, offering 2.8 of its shares for every Xstrata share, or a 15.2% premium, and valuing the 66% of Xstrata it doesn’t own at US$39 billion. Xstrata shareholders other than Glencore would hold a 45% stake in the merged company

If successful, that would make it the largest mining merger in history in nominal dollar terms, with the resulting mega-company boasting a market capitalization of about US$90 billion. That would place the group solidly in fourth spot among the world’s largest mining companies, behind only BHP Billiton, Anglo American and Brazil’s Vale.

(The previous two big deals in the mining ended up as misses, with Xstrata pulling out of a £29-billion hostile approach for Anglo American in October 2009, and BHP Billiton withdrawing from what would have been the world’s biggest mining deal, a $66-billion offer for Rio Tinto in 2008.)

The two sister companies have been fingered as potential merger mates for the last six or seven years, but it was only Glencore’s US$10-billion initial public offering in May 2011 that valued Glencore in its entirety at US$59 billion and truly laid the groundwork for this year’s potential full merging.

Before that, Xstrata shareholders had been unable to put a reliable value on Glencore, making any all-share offer from Glencore a non-starter.

Things reportedly took a turn for the serious between the two companies in early December 2011 during meetings in London between Xstrata CEO Mick Davis and Glencore honcho Ivan Glasenberg, who had been speaking every few weeks since Glencore’s IPO. Playing middleman in all this was Michael Klein, former vice-president of Citigroup, who is listed as a “strategic consultant” to both companies.

In the new company, Davis will be CEO and Glasenburg, his deputy CEO and president. Glasenburg, 55, rose through the ranks of the infamous Mark Rich & Co. trading outfit, renamed Glencore in 1994 after a management buyout. Prior to taking the reins at Xstrata in 2001 and taking it public in 2003, Davis made a name for himself by helping to orchestrate the merger of Australia’s BHP with the U.K.’s Billiton in 2001.

Xstrata’s current CFO, Trevor Reid, would be CFO of the merged company, while Glencore’s CFO, Steven Kalmin, would be deputy CFO. Similarly Xstrata’s non-executive chairman John Bond would be non-executive chairman of the merged company’s board, which would include Davis, Glasenburg and four nominees each from Xstrata and Glencore.

The merging of assets is planned to be fairly straightforward on paper, with Glencore’s operating assets integrated into Xstrata’s existing business units, and Xstrata’s marketing functions to be taken on by existing Glencore managers.

The Ontario Securities Commission has leveled charges against Ian Telfer, the high-flying mining exec most recently known for his roles as chairman of both Goldcorp and Uranium One.

Specifically, the OSC alleges that Eda Marie Agueci, Dennis Wing, Santo Iacono, Josephine Raponi, Kimberley Stephany, Henry Fiorillo, Joseph Fiorini, John Serpa, Jacob Gornitzki and Pollen Services Ltd. “engaged in an illegal insider tipping and trading scheme” between April 2007 and February 2008.

The OSC states that the Telfer “did not participate in the scheme but he later facilitated other conduct by Agueci and Iacono including disguising the beneficial ownership of securities and circumventing the monitoring by Agueci’s employer of her communications and trading, all of which was contrary to the public interest.”

And we say a final goodbye to Murray Pollitt, founder of Toronto-based brokerage house Pollitt & Co. and Eastern Canadian gold miner Wesdome Gold Mines, who died at 70 on Feb. 5 after fighting cancer for 12 years.

He is perhaps more widely known in the investment community owing to his biting, funny and insightful commentary on the gold sector and mining generally.

His obituary in The Globe and Mail noted that he will be “missed by many and remembered by all who knew him as a wise soul who had a great kick at the can.”



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