EU Conditionally Approves Glencore-Xstrata Deal

The European Commission on Thursday cleared Swiss commodities trader Glencore International Plc.’s (GLEN.L,GLNCY.PK,GLCNF.PK) proposed acquisition of Xstrata Plc. (XTA.L,XSRAY.PK,XSRAF.PK) with some conditions. Xstrata is the world’s fifth largest metals and mining group and Glencore is a leading metals and thermal coal trader globally.

It was in early February that Xstrata agreed for an all-share merger of equals with Glencore, to create a $90 billion natural resources group to be called Glencore Xstrata International Plc. The deal had won the approval of both companies’ shareholders on November 20.

Today’s clearance is conditional on the termination of Glencore’s off-take arrangements for zinc metal in the European Economic Area, or EEA, with zinc metal producer Nyrstar and the divestiture of Glencore’s minority shareholding in Nyrstar.

The Commission had concerns that the merged entity would have the ability and incentive to raise prices for zinc metal, an important input for many EU industries. According to the agency, these commitments address these concerns.

Commission Vice President in charge of competition policy Joaquín Almunia stated: “The merger will bring together two major global players in key commodities. The proposed remedy ensures that competition in the European zinc metal market is preserved, so that European customers such as steel galvanisers and car makers can continue to produce valuable consumer goods at low prices and good quality”.

The Commission’s preliminary investigation found that the proposed merger would have raised competition concerns for the supply of zinc metal in Europe, as the deal might significantly strengthen Glencore’s already strong position in the EEA.

Currently, Glencore is the largest supplier of zinc metal in the EEA having an exclusive off-take agreement with Nyrstar, an off-take relation for some of Xstrata’s EEA output, production from Glencore’s own smelter in Italy and imports.

Glencore also controls Pacorini, an owner of London Metal Exchange approved warehouses notably in New Orleans, where a large amount of zinc metal is stored. The company also controls a large amount of exports and storage of EEA produced zinc metal.

Xstrata is the second largest producer of zinc metal in the EEA. It owns a large smelter in Spain and a smaller smelter in Germany. Together Glencore and Xstrata are the world’s largest supplier of upstream zinc concentrate.

The Commission believed that as originally notified the merged entity would have more ability and incentive to control the level of zinc metal supplies in the EEA than now. For example, by exporting material to LME-certified warehouses outside the EEA or withholding supplies from the EEA market.

”Reaction from competitors, including imports, would not be sufficient to prevent the risk of a significant price increase for zinc metal,” the Commission said.

Addressing these concerns, Glencore committed to terminate its exclusive long-term off-take agreement with Nyrstar and not to buy directly or indirectly any EEA zinc metal quantities from Nyrstar for a period of ten years.

Glencore will not engage, for ten years, in any other practices which have the effect of materially restricting Nyrstar’s ability or incentive to compete effectively with Glencore in zinc metal in the EEA. The commodities trader also agreed to divest its minority shareholding of around 7.79 percent in Nyrstar.

The Commission concluded that the deal with these modifications would not raise competition concerns.

GLEN.L is up nearly 3 percent at 343.90 pence.

XTA.L is also gaining around 3 percent at 1,027 pence.

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by RTT Staff Writer

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