September 6, 2012 8:27 pm

Glencore highlights threat to mega-deals

The possible collapse of a plan to combine trading house Glencore with miner Xstrata would lift the value of failed mergers in the natural resources sector to nearly $1tn in the past decade.

Bankers and industry executives say that the troubled Glencore-Xstrata merger is the latest in a series of deal setbacks, following an era of commodities mega-deals in the early 2000s.

Failed-M-and-As-graphic

Failed-M-and-As-graphic

They say acquisitions in mining, oil and gas have faced greater headwinds from lower raw materials prices, rising shareholder activism, higher regulatory scrutiny and financial market turmoil.

Marius Kloppers, chief executive of BHP Billiton, recently suggested that the prospect of significant M&A in the sector was small. In the case of BHP Billiton, the world’s largest mining group, he added, the chance was “nothing to very low”.

The mining sector in particular has struggled to close big ticket M&A deals. According to Dealogic, a data provider, about $600bn in mining deals have failed since 2000, with the bulk of that figure in the past four years, after several high-profile deals, involving Xstrata, Vale, Anglo American, BHP Billiton and Rio Tinto collapsed.

If the Glencore-Xstrata merger is voted down on Frida at a shareholder meeting in Zug, Switzerland, that will push the figure to $680bn. Barring an 11th-hour deal between Glencore and big independent shareholders, that is set to happen, according to people familiar with the matter.

The oil and natural gas sectors have nearly $300bn in failed M&A since 2000. Moreover, some landmark mergers in the energy sector, such as the 2002 combination of Conoco and Phillips, have unravelled.

Bankers say that the slowing of mega-deals has been in part a natural process as the industry has consolidated. “You cannot have a second act for Exxon and Mobil or BHP and Billiton,” says a banker deeply involved in natural resources dealmaking. “The big deals are all done.”

However, industry executives and bankers caution that the high value of failed M&A deals in part reflects the fact that the sector has been especially busy during the past decade.

According to Dealogic, oil, gas, steel and mining companies have announced deals this year worth $350bn, more than double the $152bn of the real state sector, which ranks second in the M&A table of 2012.

The start of the commodities super-cycle – a period of higher prices on the back of the industrialisation and urbanisation of China and other emerging countries – coincided with some of the most important deals of the natural resources industry, including the merger of BP and Amoco in 1998, Exxon and Mobil in 1999, BHP and Billiton in 2001 and a string of deals by Xstrata.

Additional reporting by Helen Thomas and Anousha Sakoui in London

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