Xstrata Recommends Shareholders Accept Glencore Bid

Too Big To Regulate?

A £56bn mega-merger between a mining giant and a commodities trader moved one step closer today after Xstrata recommended its shareholders accept the offer from Glencore.

The recommendation comes three weeks after Glencore raised its share offer from 2.8 new shares for every Xstrata share held to 3.05.

In a bizarre twist, former prime minister Tony Blair was called to help broker the revised $36bn (£22.5bn) bid.

If the deal goes ahead, it would create the world's fourth-biggest natural resources firm - worth around $90bn (£56bn).

Questions have been asked about whether the merged entity would be too big; Glencore owns ships than the British Royal Navy and handles 3% of the world's oil consumption through its operations in 40 countries from Australia to Argentina.

Xstrata meanwhile employs more than 70,000 people in 20 countries and is one of the largest producers of the top seven commodities used in manufacturing and production.

Its activities have sparked protests in countries including the Dominican Republic and Peru - where two demonstrators died - and the latest meeting of the Xstrata board also attracted opponents, some carrying a placard saying: "Your money kills", but nobody expects that to scupper a potential deal.

A merger would see the new company become the number one producer of coal, zinc and lead - with the possibility of it also becoming the biggest independent producer of copper.

Paul McKnight, investment manager at stockbroker Redmayne-Bentley, told The Huffington Post UK there was a possibility the merged entity could become difficult to regulate.

"The proposed merger is subject to regulatory approval, however given the size of the merged company and its global structure there is a danger that a monopoly similar to Microsoft's domination of their market could result," he explained.

"If the mining company (in this case Xstrata) is the dominant or major supplier in a particular resource, then the commodities trading side of the company (Glencore) could manipulate resource production to the benefit of its own book - this is a particularly tricky area for the regulatory authorities and the outcome of the regulatory approval will make for interesting reading."

However, given Xstrata deals in so-called 'hard commodities' or base metals, and not the 'soft commodities' such as wheat, coffee and sugar, the commodity trading side of the company should not have any more influence on food stuff prices than it currently has, McKnight added.

Mike van Dulken, head of research at spreadbetting company Accendo Markets, agreed that Xstrata was unlikely to move further into the soft commodities market, but given the size of the potential new entity, the control of supply and therefore pricing concerns on things like Copper, Nickel and Zinc are justified and may form part of the regulator's demand for approval.

Van Dulken also said Glencore would be potentially putting itself at more risk, despite already having a stake in Xstrata and other mining companies.

"In a sense it is already a miner and a trader," he said. "The risks are that it becomes more exposed to economic downturn. As mostly a trader, its risk was less, so a merger would increase its mining-related risks."

Mike McCudden, head of derivatives at Interactive Investor, wasn't convinced that regulation of the new company would be impossible, but did warn of the bigger risk of its potential to manipulate the market.

"(However), there are competitors and a move like this may well simply serve to stimulate further evolution in the market," he added.

"The 'chinese walls' that are likely to be required within the business would probably be more secure than we've seen previously and could indeed raise the level of transparency."

It is by no means a done deal however, as even today potential hurdles were being thrown at the merger.

Iain Richards, head of governance and responsible investment at Threadneedle Investments, said in a letter to Xstrata's board that he found the recommendation to shareholders of Xstrata to vote for the deal "deeply disappointing".

He added that no one should be in "any doubt" that the merger is actually a takeover, which is "heavily weighted in favour of Glencore, which clearly needs this far more than Xstrata does".

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