Will Glencore's IPO Spark a Merger War?

Glencore's $11 billion from its initial public offerings in London and Hong Kong will give the commodity trader considerable firepower for acquisitions and could preface a wave of consolidation in the mining sector, analysts say.

The Glencore logo seen in front of the Swiss commodities giant's headquarters in Baar.
Sebastian Derungs | AFP | Getty Images
The Glencore logo seen in front of the Swiss commodities giant's headquarters in Baar.

The commodity trader’s IPO was fully covered on its first day as investors crowded into what looks set to be the first company in a quarter of a century to jump directly into the FTSE 100.

However, with commodity markets collapsing on Thursday, led by a strengthening dollar and a $10 drop in the oil price, some analysts suggest that the float has come at the top of the market.

Around half of the IPO money is already set aside to buy a larger stake in Kazzinc, which owns zinc assets in Kazakhstan and Russia.

Many in the markets also believed that the Swiss group would also look to use its capital injection to complete a merger with Xstrata, another diversified mining group in which Glencore has a 34 percent stake. Glencore CEO Ivan Glasenberg has publicly stated his preference for such a deal.

A merger is not included in Glencore’s prospectus so a deal in the immediate term seems unlikely, but some analysts have pointed out that Xstrata’s replacement of chairman Willy Strothotte with Sir John Bond in May both removes a potential obstacle and highlights the connection between the two businesses. Strothotte is chairman of Glencore and the company’s former CEO.

“What the Glencore IPO does is crystallize the valuation of a beast that wasn’t very transparent,” Peter Davey, head of metals and mining equity research at Standard Bank, told CNBC.com.

“When it does crystallize, we can see whether there’s any virtue in a combined Glencore and Xstrata… I doubt the merit of Xstrata merging with (Glencore) because I think Xstrata has a better portfolio,” Davey added.

Glencore might need to build its portfolio of mining assets in order to become a more attractive partner for Xstrata CEO Mick Davis, which might mean pre-empting Xstrata’s buying decisions and moving into frontier geographies that are as yet untapped by some of the other major mining groups.

“I can see (Glencore) becoming a bit more active in the African space, where others fear to tread,” Davey said. “Glencore could use the firepower to get some of the [African] assets that Xstrata covets… maybe in iron ore or copper.”

African Deals

Glencore already has stakes in copper assets in the Democratic Republic of Congo and Zambia. Many large mining groups have shied away from African assets outside of South Africa, as political risk factors and poor infrastructure add to high operating costs.

However, African deals are now gaining greater traction due to a combination of long-term supply concerns, higher commodity prices and a newfound stability in resource-rich but previously troubled countries, including Mozambique, Liberia, Sierra Leone and Guinea.

The presence of large emerging market players – notably Brazil’s Vale, which has made several multibillion dollar investments – has also refocused attention on the region.

The region has recently seen several large deals. Rio Tinto, which historically has focused mainly on countries within the Organization for Economic Cooperation and Development, last year bid close to $4 billion for Mozambique-focused coal miner Riversdale Mining.

In February 2011 Equinox Minerals offered nearly $5 billion for Lundin Mining, which has sizeable exposure to Zambia and the Democratic Republic of Congo.”

2009 saw a slump in mining mergers and acquisitions, as liquidity dried up and banks were unable or unwilling to finance deals.

“In 2009 there wasn’t affordability, so whether companies could find value or not they couldn’t do the deals,” Lee Downham, UK head of metals and mining at Ernst & Young, told CNBC.com. “Now affordability is back.”

However, he adds, “It’s very difficult to find value in jurisdictions that are developed.” This is partly why Africa is emerging as an investment destination.

“Africa as a whole is de-risking. It’s still risky compared to other jurisdictions, but it’s nowhere near as risky as it was 10 years ago,” Downham said. “That is partly due to the fact that China is investing heavily in these jurisdictions, which is making the infrastructure issue less of an issue.”

Greater Muscle for Glencore

Deal flow in the first quarter of 2011 is down slightly on 2010, but Downham believes that this will rebound in the second quarter and the second half of this year.

"Gearing (in the mining industry) is as low as it’s been and cashflow is strong. There are only so many organic deals you can announce,” he added.

Whether, and how, Glencore will add to this remains to be seen.

“I think (the IPO) gives (Glencore) greater muscle to expand their network into new territories… We’re seeing a lot of activity into satellite emerging markets in Latin America and Africa,” John Meyer, resources analyst at Fairfax Securities, told CNBC.com.

Mid-tier miners could offer good value for Glencore as it looks to consolidate its interests in the region.

“Equinox is now being bought up by Barrick Gold. That’s the sort of deal that they might want to get in on,” Meyer said. A company like First Quantum, the Zambia-focused copper miner and an existing partner of Glencore, might make sense, he added.