August 21, 2012 12:59 pm

Glencore – a cliffhanger

Merger between commodities trader and Xstrata still makes sense

Don’t call me, I’ll call you. That sums up Glencore’s latest attitude towards Xstrata. The Swiss trading-cum-mining house’s recent bluster suggests that it holds all the aces in deciding the future of 34 per cent-owned Xstrata, and can merge fully with it when it wants. But its tone has changed from the “we’re the best of mates” spin when the merger was announced in February to the seeming indifference of “we don’t need the deal” now.

Qatar Holding, which has built up a near 12 per cent stake, has forced this change. The sovereign wealth fund has asked for 3.25 Glencore shares for each Xstrata share, versus the 2.8 offered. But Glencore has not budged and, with the Qataris in effect blocking the merger – and Glencore seemingly in retreat – other investors have broadly concluded that the deal is dead: the merger ratio implied by current share prices has fallen to 2.6.

Glencore, Xstrata

Yet the adjectives lavished on Glencore’s trading business in Tuesday’s first-half results as well as trading’s resilience argue in favour of proceeding. As miners everywhere report lower earnings on falling commodity prices, weaker demand, lower output and rising costs, first-half earnings before interest and tax in Glencore’s mining operations fell a third from a year ago. Trading ebit, however, was down a more modest 11 per cent to $1.1bn, and up more than two-thirds on the second half of 2011. Increased copper trading volume helped lift metals and minerals trading ebit 9 per cent from a year ago.

Investors would not disagree with Glencore’s unflattering view of the near-term commodities outlook. Nor can they ignore the protection that a trading arm offers. Glencore boss Ivan Glasenberg may think he can come back another day. But his balance sheet may be stretched in a year or so, as net debt rises. And who knows what the future holds? Qatar does not look to be going anywhere either. Thus, Glencore must try to execute the merger now, and investors should seize on the offer while they can – if only the carefree Qataris will let them.

Email the Lex team in confidence at lex@ft.com

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