Two of the City’s biggest companies have outlined ambitious plans for a £56 billion mega-merger to create an unprecedented global mining and commodities powerhouse.Xstrata and Glencore struck a deal that would give them control over the trade in everything from the wheat in a loaf of bread to the wiring in everyday electrical items.If the merger is successful, it would also trigger a multi-million-pound windfall for Mick Davis, boss of Xstrata. But his wealth pales in comparison to that of Glencore boss Ivan Glasenberg, who became a multi-billionaire last year when the company floated. So who are the two men determined to push through a merger code-named ‘Everest’? Geoffrey Levy reports . . .
What started as an idea over a cup of tea in a London hotel became a deal by the time the two friends were on the Swiss ski slopes near Zug.
And not just any deal, but the creation of a £56 billion behemoth that critics fear will be powerful enough to exert a price stranglehold over metals, minerals and goods vital to everyone on earth.
The deal is being billed as a marriage of the ‘digger’ Mick Davis, chief executive of Xstrata, one of the world’s biggest mining groups, and the ‘dealer’ Ivan Glasenberg, his opposite number at Glencore, the most powerful commodity trading company on the planet.
Appropriately, the two are said be like ‘an old married couple’, their great mutual affection being combined with an undertow of bickering and rows. They go back a long way — to South Africa, where both were born, in the late Fifties, and educated.
More... Stephen Hester says Royal Bank of Scotland clean-up costs will take bill to £83bn RBS boss Hester turns down £1m bonus to head off clash with MPsThe mega-deal is described as a merger of ‘equals’, but is it also a ‘merger of egos’, which will serve for their personal aggrandisement and enrichment?
The fiercely competitive Glasenberg, son of a Lithuanian luggage maker who emigrated to South Africa, is small, quietly-mannered and worth in the region of £5 billion.
He lives in Switzerland with his wife Elana and two children. As a young man, he was the national student race-walking champion and might have competed in the 1984 Olympics but for the apartheid-era ban on his country.
Davis, 6ft 5in, burly and bearded, with a manner that some find overbearing, lives with his wife Barbara in a large Hampstead house filled with examples of fine art from his native South Africa and pictures of his three children. The mansion often reverberates with the sounds of the opera music he loves.
If this merger goes through, he might just be able to buy his own opera house.
But already there are fears that the new behemoth, dubbed ‘Glenstrata’ — and the corporate buccaneers who will run it — will exert huge power over world markets in commodities.
The worry both in the City and among groups campaigning for the world’s poor, is that a monster company on this scale will inevitably feed off its customers and devour smaller competitors, restricting competition.
David McNair, tax expert at Christian Aid, which has campaigned on behalf of poorly-paid workers at Glencore’s copper mining operations in Mufulira, Zambia, who claim they have suffered serious pollution, says: ‘Clearly it would create a gigantic company with a massive effect on people and the environment across the world, for better or for worse.’
Gigantic is certainly the right word. The deal brings together two groups to create a giant octopus which last year generated a mind-boggling £137 billion in revenues — equivalent to the entire UK national deficit last year.
Davis describes Glasenberg — who runs and swims every day to maintain his lean figure — as the most impressive businessman he knows. Glasenberg certainly has an impressive list of contacts.
Quietly-mannered: Glasenberg, the fiercely competitive son of a Lithuanian luggage maker, is worth in the region of £5billionA close friend is banking heir Nat Rothschild, who invested millions in Glencore when it was floated. Other friends include the ubiquitous Russian oligarch Oleg Deripaska, who controversially hosted George Osborne and Lord (Peter) Mandelson on his yacht nearly four years ago in Corfu.
Curiously, some think, it is Davis, 53, who has been named as the chief executive of the new company, which will be created provided it can overcome regulatory hurdles concerning monopolies. Glasenberg will be his deputy.
Some observers are murmuring about a ‘Granita’-style arrangement between the two, mirroring the New Labour plans laid at the Islington restaurant where, according to Gordon Brown, Tony Blair agreed to hand over the Labour leadership after a certain time.
Why would such a deal have been put in place with ‘Glenstrata’? The theory is that Glencore’s corporate image is tarnished by accusations of greed, and that it needs someone new at the helm to give its public relations a polish.
The Mercedes-driving Davis, known in the City for his thoroughness as well as mood changes that can go from warm to icy in a trice, will by now be familiar with the recent allegations against Glencore, which do not make for very comfortable reading.
As a trustee (along with his wife) of the Kew Foundation, which supports the work of the Royal Botanical Gardens, Davis is bound to have familiarised himself with all the details of the troubled Zambian village of Mufulira.
There, the inhabitants complained that the vast profits generated by mining the copper that lies beneath their ramshackle homes were made at the expense of their health.
Most of the men work as miners for Glencore’s subsidiary, the Mopani Mining Company, and it was claimed that sulphur pollution there was 70 times the level recommended by the World Health Organisation.
True, Glencore has said that it is improving the environment and investing heavily to stop sulphur emissions by 2015.
But mining industry experts have claimed that lives were being ruined by toxic fumes causing serious respiratory diseases, and that ‘acid rain’ is also being created.
Glencore's UK headquarters on Berkley Street, LondonOne expert who visited the village found paint peeling off the villagers’ homes. Stories of personal tragedy included the young expectant mother who collapsed after drinking contaminated water and later miscarried.
At the same time, in Zambia alone, the Swiss-based company whose turnover last year of £89 billion is more than the GDP of New Zealand, has been accused of manipulating its financial accounts in order to reduce its tax bill, depriving that poverty-stricken nation of much-needed income.
All perfectly legal, of course, but the moral conduct of the newly-created giant is sure to come under the microscope.Investors may be happy to receive high returns on their shares (indeed the merger is expected to squeeze out an extra £340 million in profits), but recent austere times have seen the development of a heightened anger among the general public at increasing corporate profits.
So will the new company have a shiny new image?
The appointment of the smooth City grandee Sir John Bond — current chairman of Xstrata — as its chairman will help. (This despite the fact Sir John is best known for being the former chairman of HSBC, who plunged that normally prudent bank into the teeth of the U.S. sub-prime mortgage crisis with his purchase of American ‘trailer park lender’ Household in 2003. One lives and learns.)
Of course, this merger may be torpedoed by any one of a battery of competition watchdogs. But if not, let’s hope Mick and Ivan are aware of their responsibilities when they take control at the helm of this modern giant.
They'll be richer, but we'll all pay the priceCommentary by Alex BrummerGiven that modern commerce is increasingly dominated by global behemoths, the planned £56billion merger of Swiss-based commodity trader Glencore and London-based mining giant Xstrata may seem unimportant to many.
Glencore, according to its website, ‘produces, sources, processes, refines, transports, stores, finances and supplies commodities needed by industries around the world’ — whether those commodities are grain, metals, coal or oil.
It already owns 34.4 per cent of Xstrata, so at first glance this appears to be no more than a tidying up exercise with their respective bosses, both South African exiles, sharing the spoils.
Impact: A Colombian women holds a bottle representing polluted drinking water in front of the headquarters of Swiss commodities and mining giant Glencore last year in BarrIndeed, the two companies are confident they can convince authorities in Europe and around the world that they are already ‘family’ and there is therefore no need to scrutinise the deal to see if it threatens global competition.
But the reality of bringing them together is much more threatening than it might seem. Xstrata is, at present, a straightforward mining company that extracts resources from the ground, then sells them to other businesses.
But Glencore’s business model is very different. As a commodity trader it plays the market — holding on to commodities by storing them, refining them or processing them — and gambles on selling its goods at the most advantageous price when the time is right.
The proposed new enterprise, nicknamed ‘Glenstrata’ in the financial world, would adopt this Glencore business model and become the world’s first natural resources group to control every stage of the supply chain, from the commodities it mines (such as metals) and grows (wheat and corn) to market.
This would mean it could control the prices of all manner of everyday household goods, from fuels and electrical wiring to bread and cereals.
Britain plays host at present to several large-scale mining groups including Rio Tinto and BHP-Billiton.
Even though Rio Tinto and BHP operate mines across the globe, they do not trade and speculate in the coal, iron, copper and other precious metals they mine. In contrast ‘Glenstrata’ will control immense mineral extraction and farming activities, and trade in the resources produced by those activities.
That means Glenstrata will have control over both production and trading.
'The very poorest nations, needing basic foodstuffs to keep their populations alive, could also suffer at the hands of such a global monolith'As a result it will be able, should it choose, to control the world supply and prices of vital materials by hoarding them until the price rises or, in the case of grains, holding them in store houses — like a scene from biblical Egypt — to await a drought then carefully let supplies onto the market as the price rises.
This will endow Xstrata-Glencore with enormous power. China, India and the newly industrialised world compete for materials and commodities with the U.S., Japan, Germany and Britain.
And Glenstrata with its hold over so many basic materials will often hold the whip hand. The price of basic goods — from bread to the copper wire needed to carry fast broadband to our homes – will potentially be in its hands.
And it is not just rich countries that will be vulnerable. The very poorest nations, needing basic foodstuffs to keep their populations alive, could also suffer at the hands of such a global monolith.
Only this week it was disclosed that for the past eight months Glencore has been the biggest single supplier of wheat to the UN World Food Programme — taking more than £50million of its aid budget. The dominant role a combined Glencore and Xstrata will have in commodity markets does not bear thinking about.
Glencore already controls some 60 per cent of the world’s free market zinc; 50 per cent of copper metal; 45 per cent of lead, plus great slices of the aluminium, nickel, cobalt and ferrochrome (a chromium and iron alloy) market.
It is also a huge player in the grain and other ‘soft’ food commodity markets.Xstrata, meanwhile, is a powerhouse in coal, as well as steelmaking. The new company would be responsible for a third of the world’s exported coal.
That and all the other commodities over which it has such a tight grip will constitute a terrifying degree of market dominance that can only become a source of grave misgiving to consumers, regulators and world governments.
Not surprisingly the proposed merger has lifted the gloomy mood of the global financial community. If completed, it will be the biggest deal since the financial crisis of 2007-09: fees for bankers involved are expected to be £90million or more.
But while City mercenaries are keen, some shareholders are less enthusiastic.
They fear that earnings from Mick Davis’s highly successful pure mining venture Xstrata could be sullied by linking up with a company that gambles on the volatility of commodity prices.
In the end, this deal will be decided not by shareholders but by countries and competition watchdogs. We often complain that the European Commission interferes too much in the domestic affairs of its members. But this deal screams for a full-scale competition inquiry to kill it dead in its tracks.
