Glencore-Xstrata gatecrashers in short supply

There’s never been a better time to bid for Xstrata. Glencore’s 34 percent stake has always been a stumbling block but now some Xstrata shareholders oppose an all-share merger proposal from the commodity trader. That backlash could build, and both boards would have to consider any credible counter-bids. An auction may not be probable – but it isn’t impossible.

Size limits the field for a full bid. Topping Glencore’s offer by 20 percent would value all of Xstrata’s equity at about 45 billion pounds ($71 billion), with another $8.1 billion in net debt. So only three global miners are credible gatecrashers – BHP Billiton, Rio Tinto, and Brazil’s Vale.

BHP and Rio are already so big that extra economies of scale wouldn’t be huge. They want only the biggest and best projects, and are thus a bit sniffy about Xstrata’s mines. Mostly they are targeting different resources anyway. Vale initially appears more promising. The Brazilians could reap more synergies, chiefly in Canadian nickel, and tried to buy Xstrata in 2008. But missing out then proved a lucky escape, and Brazil has since reined Vale in.

A breakup is conceivable. The biggest draw would be Xstrata’s operations in copper, a metal both BHP and Rio like. Copper will provide 47 percent of Xstrata’s EBITDA this year, HSBC reckons. Comparable deal valuations imply the business could fetch $50 billion including debt – nearly 70 percent of Xstrata’s enterprise value. Still, a carve-up would be ambitious.

Everything hinges on Glencore. Its board is dutybound to accept any offer for its Xstrata shares that represents compelling value. But Glencore doesn’t need cash. It would doubtless set the bar high on price given the value of existing rights to market Xstrata’s production – contracts which would be in jeopardy in any sale. After all, Glencore wants to produce and trade ever more commodities: abandoning its desired merger with Xstrata would merely halt that progress; selling out could put it into reverse.

An interloper is unlikely to be the reason that Glencore ups its offer for Xstrata. That weakens the leverage of dissident shareholders. But their resistance alone could still be enough to force a raise.