Glencore and Xstrata announce $90bn merger deal

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Media captionRupert Nathan from stock market research firm Fat Prophets: "This merger creates a formidable entity"

Mining firm Xstrata has formally announced plans to merge with Glencore, the world's biggest commodity trader.

The deal would value the combined new business at $90bn (£56bn), of which Xstrata would comprise $39bn.

The announcement came as Xstrata revealed a 20% increase in profits for 2011, to $5.9bn (£3.8bn).

But two major Xstrata shareholders say they will vote against the deal as it undervalues their shares.

But Standard Life Investments and Schroders, which between them own 3.6% of Xstrata, said the deal undervalued the firm and they would vote against the merger.

"This is a fabulous deal for Glencore, it's probably a great deal for the Xstrata management, but it's a poor deal for Xstrata's majority shareholders," said Schroders' Richard Buxton.

The deal was described by the two firms as a "merger of equals" with the new company to be named "Glencore Xstrata International PLC".

The new group will be the world's biggest exporter of coal for power plants, and the largest producer of zinc.

Glencore chief executive Ivan Glasenberg said the merger would create "a new powerhouse in the global commodities business."

Ratings agency Moody's responded to the merger news by placing the ratings of both companies on review for a possible upgrade.

"The merger will increase the diversification of both companies, with Glencore achieving stronger control over the high-quality mining resources of its currently 34% associate Xstrata, and the latter gaining full access to the trading and logistic platform of Glencore," it said.

Xstrata chief executive Mick Davis will head up the new firm, with Mr Glasenberg becoming deputy chief executive. The Xstrata finance head will likewise take the senior role in the combined firm.

Best deal?

The valuation of Xstrata translates to a share price of 1,290p - compared with the 1,100p at which shares were trading before news of the deal emerged last week.

Xstrata's shareholders - other than Glencore - would have a 45% stake in the new firm.

Shareholders will be able to vote on the merger in April, after Glencore's full year results have been announced.

Xstrata said the merger would need a 75% majority. Excluding Glencore's 34% stake, that would mean shareholders holding at least 17% of Xstrata's shares would be able to block the deal.

News of the unease saw Xstrata shares fall almost 5% by Tuesday afternoon.

Xstrata's 2011 financial results were well above market expectations, according to stockbrokers Charles Stanley.

"Given this performance, shareholders of Xstrata are entitled to ask if this is the best deal available, as Glencore paper has been disappointing," the brokerage said.

However, other analysts felt the merger of the two firms offered a good deal.

Richard Knights of Librium Capital said: "We think this looks a good deal for Xstrata shareholders, they gain access to some very fast growing assets and a world class trading platform."

Glencore only floated on the stock exchange in May last year in a record share offering in London.

The traditionally secretive Swiss firm buys and sells metals, crops and fuels in the financial market and invests in mining companies, but - unlike Xstrata - Glencore does not typically itself extract the stuff out of the ground.

For its part, Xstrata owns vast reserves of coal, copper and nickel across Africa, South America and central Asia.

About half of its revenues came from its copper business in 2011, while coal contributed the most to its profit growth.

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