The merger of Glencore and Xstrata combines a cheap commodity trader with a cheap miner. The board’s challenge is to make the deal more than just one big cheap natural resources company.
“Glenstrata” will be unique among the big diversified miners, combining Xstrata’s formidable footprint in copper, coal, nickel and zinc with Glencore’s mining operations, an energy unit and the world’s biggest commodity trading business. Yet, their combined $71 billion market capitalisation is a 16 per cent discount to a rough sum of the union’s parts.
The mining businesses should make Ebitda of about $14.5 billion next year, based on Macquarie estimates, which include merger synergies and assume better commodity prices. Apply Xstrata’s current forward enterprise multiple of 6.4 times, and adjust for roughly $34 billion of attributable net debt, and the mining assets contribute $59 billion of equity. Glencore’s commodity trading business is worth about $24 billion, taking the average 10.2 times earnings multiple of listed trading peers to Macquarie’s forecast of $2.4 billion of marketing earnings next year. The two companies also hold minority stakes in listed companies worth about $2 billion. Tot it up and that’s $85 billion.
What is holding investors back? Newness is one factor. Glencore has been a public company for a little over a year. Its trading arm still has to prove itself after Glencore’s earnings were hit by a surprise $330 million trading loss in cotton last year. There are also integration concerns as the merger melds together two different cultures.
Both worries would be alleviated by strong governance. But the messy management of the nine-month takeover saga has dented the credibility of the Xstrata slate of incoming directors, including chairman John Bond, who will step down after the merger consummates. Glencore’s board is operationally savvy but lacks a towering figure to balance the influence of chief executive Ivan Glasenberg, who will run the merged group after a six month transition period.
Glasenberg will hold eight per cent of the combined company. But even a self-interested owner-manager needs to be complemented by a strong chairman with reputational clout that can be put to work on behalf of all shareholders. Glencore-Xstrata’s re-rating will start in the boardroom.
