Some investors have already critcised the proposed Glencore-Xstrata merger
By Ben Griffiths | Published 09:48, 14 March 12
Will the proposed merger of Glencore and Xstrata buck the recent trend of failed big mining deals and give the mergers and acquisitions market a shot in the arm?
For the army of City advisers including investment bankers, lawyers and public relations executives the juicy fees the near-£60 billion combination would yield promise to get 2012 off to a flying start.
The Glencore/Xstrata deal - dubbed Glenstrata by the City - represents the largest M&A deal since the US government bought almost 61 percent of insurer AIG in September 2010, according to Dealogic.
In Europe, it would be the largest targeted deal since April 2007 when RBS, Santander and Fortis carved up Dutch bank ABN Amro - the deal that brought disgraced banker Fred Goodwin’s empire to its knees.
Glenstrata would also be the biggest mining deal ever, creating a global mining and commodities trading powerhouse. According to credit rating agency Moody’s, Glencore would gain greater control of mining resources which could be fed into its trading operation, freeing the group from over-reliance on third-party miners.
The flip side is that Xstrata would gain access to Glencore’s trading platform and logistics network: the group owns ports, warehouses and ships as well as market intelligence.
The deal was initially well received by the market with shares in both firms boosted. But just days after the merger was announced, institutional investors Standard Life and Schroders said they would refuse to back the deal, and Royal London and Fidelity, the big US investment house, joined a growing list of shareholders seeking a change in the terms of the merger.
An investor roadshow was called to win shareholders over to the merits of the deal.
Acquiescence is crucial because, with Glencore already owning 34 percent of Xstrata, just 16.4 percent of shareholders would be needed to block the deal from going through.
Another potential threat comes from worldwide competition authorities. The huge mining and commodities group would have a dominant position in trading and big shares of the market for crucial raw materials such as copper, lead and zinc as well as coal.
If it were felt the combined group would have too much control over prices, it could find regulators are not prepared to give it the green light.
It’s little wonder then that to some observers, Glenstrata has started to look like one of the worst advised deals of recent years.
Not since FTSE 100 insurance group Prudential failed to convince the market of the need to raise new money through a rights issue to pay for its desired acquisition of rival AIA has a deal looked on such shaky ground.
And yet it comes at a time when the market is desperate for some deals to kick-start another M&A boom. Much smaller deals are starting to be seen: the approach by Switzerland’s Temenos for British rival Misys would create a £2 billion company.
But a successful mega-merger could fuel hopes of more to come later in 2012 and persuade companies to start making use of the cash piles they have been accumulating.
As KPMG’s Simon Collins said in the firm’s global M&A predictor report, deal activity is possible with corporate cash, private equity coffers and the availability of target companies.
Ultimately, what will matter to the future of the merger is how the deal is done. Investors need persuading. Regulators will need convincing. And employees from the boardroom to the trading floor and mine shafts will need to work hard to make sure the integrated business succeeds. That’s a lot of people to win over.