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Glencore, Xstrata Agree To $90B Merger

Mining company Xstrata and commodities dealer Glencore International have agreed to a deal that would create the world's fourth largest natural resources group.

LONDON (AP) -- After years of courting, mining company Xstrata PLC and commodities dealer Glencore International PLC have agreed to marry in a $90 billion deal that would create the world's fourth largest natural resources group.

The announcement of the terms of the deal comes just a few days after the first public acknowledgment that the two companies were in discussions about a long-mooted tie-up -- merger talks, codenamed 'Everest,' have gone on for years.

The combined company will control a chain of businesses from mining to refining, storage and shipping of basic commodities like coal, copper and corn.

Though the deal is likely to win the day -- after all, Glencore already owns 34 percent of Xstrata -- there were some signs of discontent over the terms being offered, with one institutional shareholder already saying it will vote against.

Under the terms of the deal, Xstrata shareholders would receive 2.8 Glencore shares for each of their shares. That represents a premium of 15.2 percent based on Monday's closing prices.

The merger is projected to yield cost savings of $500 million in the first full year, primarily in marketing, while creating the world's fourth largest global diversified natural resource company, with operations in 33 countries. It will also give the combined company greater leverage to borrow money for its operations -- a key advantage in the high-volume, low-margin commodities business.

The new company would be the world's third-largest copper producer, fourth-largest nickel producers and the global leader in thermal coal, ferrochrome and integrated zinc production.

"The commodities value chain is becoming longer and more complex, creating opportunities for a company that can pre-emptively participate at every stage," said Xstrata Chief Executive Mick Davis, who will become CEO of the merged company.

"Glencore Xstrata would be well positioned to do just that, creating value from resource extraction to customer sales and services, at a time when demand for our combined products continues to grow," Davis said.

Davis told a conference call that he expects the merger to complete in the third quarter of this year, assuming regulators give the deal the all-clear.

Glencore CEO Ivan Glasenberg, who will take the titles of deputy CEO and president, said the merger represents "a fantastic opportunity to create a new powerhouse in the global commodities industry."

Xstrata shares were down 2.6 percent at 1,228 pence in midday trading in London; Glencore shares were down 0.8 percent at 457 pence.

The movements in the share prices indicate some disappointment in the markets that the premium being offered isn't as high as some had hoped.

"Although we see some merit in the merger of Xstrata and Glencore the proposed exchange ratio clearly undervalues Xstrata's assets and future earnings contribution," said David Cumming, head of equities of Standard Life Investments, which owns a little more than 2 percent of Xstrata stock. "Consequently it is our intention to vote against the deal unless the merger terms for Xstrata shareholders are materially improved."

Schroder Investment Management, which owns around 0.7 percent of Xstrata, also said the terms undervalued the company and that it was a poor deal for the majority of shareholders.

BlackRock Investment Management, which owns around 6 percent of Xstrata, wouldn't comment, while a spokesman for Legal & General Investment Management, a 3 percent shareholder, said the firm was figuring out its position.

The merger agreement was announced as Xstrata reported a 22 percent gain in full-year profit to $5.7 billion, compared to $4.7 billion a year earlier. Revenue was up 11 percent to $33.9 billion.

Xstrata, based in Zug, Switzerland, was formed in 2002 when it bought Glencore's coal assets. The company mines copper in the Americas, zinc in Spain and ferrochrome and vanadium in Australia and South Africa.

Glencore extracts, ships and refines raw materials from coal, to copper, to corn. It is based in the Swiss town of Baar but has its main listing in London.

Glencore was founded in 1974 by Marc Rich, the fugitive trader who was controversially pardoned in 2001 by then U.S. President Bill Clinton just hours before he left office. Rich sold the company to its employees in 1994, and the firm has been at pains to distance itself from its founder and any whiff of improper activity. Environmental groups, however, have since targeted the company for its mining interests.

Jordans contributed from Geneva.