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Glencore-Xstrata merger likely: Jeffries

Keywords: Tags  zinc, Jefferies, Glencore, Xstrata, merger, Claire Hack

LONDON — The merger of Glencore International Plc and Xstrata Plc is "not a slam dunk," analysts at New York-based Jefferies Group Inc. said Thursday, but they nonetheless expect it to go ahead.

The two companies are currently awaiting a decision from the European Commission’s antitrust body and, crucially, a vote from Xstrata shareholders.

"We (do) expect the merger to close, and the merged (company) will be one of our top long-term picks in the sector," the analysts said.

The approval from the antitrust body in Europe will require remedies on Glencore’s part, including the disposal of certain zinc assets, but the analysts say that this doesn’t necessarily represent a deal breaker.

"Glencore and Xstrata will need to propose either the sale of the San Juan de Nieva smelter in Spain or an end to the Glencore offtake agreement with Nyrstar (NV)," they said.

Zug, Switzerland-based Xstrata might also need to sell its Nordenham zinc smelter in Germany, and Baar, Switzerland-based Glencore might need to divest its Portovesme smelter in Italy, according to the analysts.

A proposal that only ends Glencore’s offtake agreement with Zurich-based Nyrstar might not be enough, they said, and there is some risk that the process could extend into a more exhaustive second-phase review.

"Either way, we expect the companies to propose adequate remedies ultimately and antitrust concerns to be fully addressed. To put it simply, antitrust issues in zinc will not be a deal breaker, in our view," the analysts said.

China’s Ministry of Commerce must also approve the merger before it can proceed, and it is expected to follow a process similar to the European Commission’s. But it could wait until after a decision is made to announce its ruling.

The analysts also said that they expect the Xstrata shareholder vote for the amended remuneration package as well as the vote for the merger to pass.

The Competition Commission of South Africa has already recommended that the country’s competition tribunal approve the deal, subject to certain conditions on employment.

"We are somewhat concerned about shareholder turnout. We strongly encourage those shareholders who support the deal to vote. If antitrust concerns are addressed and Xstrata’s shareholder votes are passed, as we expect, the deal should cross the finish line," the analysts said.

"We consider the investment case for the merged Glencore-Xstrata to be compelling from a long-term perspective," the analysts added. 

A version of this article was first published by AMM sister publication Metal Bulletin.

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