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Credit Suise - Glencore Xstrata Analysis

In: Business and Management

Submitted By bigdamndaddy
Words 1175
Pages 5
10 October 2011 Europe Equity Research Diversified Metals & Mining (Metals & Mining)

Glencore and Xstrata
Research Analysts Liam Fitzpatrick 44 20 7883 8350 liam.fitzpatrick@credit-suisse.com Michael Shillaker 44 20 7888 1344 michael.shillaker@credit-suisse.com Nihal Shah 44 20 7888 3270 nihal.shah@credit-suisse.com James Gurry 44 20 7883 7083 james.gurry@credit-suisse.com Specialist sales: James McGeoch +44 20 7888 0751 james.mcgeoch@credit-suisse.com

COMPANY UPDATE

Merger potential ahead?
Figure 1: Glencore vs XTA 12 month forward P/E
9.0 8.0 7.0 6.0 5.0 4.0 1 a 9-M y 2 a 6-M y 2 n -Ju 9 n -Ju 1 6-Jun 2 3-Jun 3 0-Jun 7 l -Ju 1 4-Jul 2 1-Jul 2 8-Jul 4 ug -A 1 ug 1-A 1 ug 8-A 2 ug 5-A 1 ep -S 8 ep -S 1 ep 5-S 2 ep 2-S 2 ep 9-S

GLEN.L

XTA.L

Source: IBES consensus; prices as of 5 October 2011

■ Summary: Following the recent underperformance and de-rating of XTA vs. Glencore, we examine the potential for an XTA-Glencore merger in this report. In keeping with its previous statements, we believe Glencore sees strong benefits to a deal and a combination would create an attractive highgrowth and differentiated major. The longer the relative rating gap exists, the greater the market’s focus on a potential transaction will likely become, in our view. At current levels, Glencore could use its premium-rated equity and pay a significant premium without a deal being dilutive, on our estimates. ■ Potential synergies: The main area of potential synergy we see is through the marketing business, where the combined entity could leverage total group production to generate greater profits through greater market share and arbitrage opportunities. We see the main upside potential within coal, copper and zinc. In total, we estimate post tax synergies of $246m$704m, or 2-6% of combined 2012E net income. There is limited operational overlap between Glencore and XTA

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