Commodities trader Glencore and miner Xstrata on Tuesday formally agreed to an all-share “merger of equals”, to create the world’s fourth-largest diversified group with a combined value of $90-billion.

The companies announced a merger ratio of 2.8 new Glencore shares for every Xstrata share, excluding the shares already owned by Glencore.

Xstrata executives Mick Davis and Trevor Reid would take up the respective CEO and CFO positions of the combined group, with Glencore CEO Ivan Glasenberg and CFO Steven Kalmin assuming deputy positions. John Bond would be the chairperson.

The combined entity, to be named Glencore Xstrata International, would be listed on the London and Hong Kong stock exchanges, with its headquarters in Switzerland, while continuing as a company incorporated in New Jersey, in the US.

“With Xstrata getting the top three jobs and a small premium, we fail to see how Xstrata shareholders have come out poorly here,” Liberum Capital commented in a research note, adding that the deal also looked “most accretive” for Glencore.

The commodities trader estimated its combination with Xstrata would deliver yearly earnings before interest, taxes, deprecation and amortisation (Ebitda) synergies of at least $500-million in the first full year, which was predominantly market related.

The combination was also said to be earnings-a-share accretive to Xstrata shareholders.

Liberum said the $500-million Ebitda synergy estimation might be conservative and said it expected a further $300-million in financing synergies, as well as potential head-office synergies of $100-million.

The merger valued each Xstrata share at 1 290.10p and the entire issued and to-be-issued share capital of Xstrata at approximately £39.1-billion, or $61.9-billion.

The deal represents a premium of about 15.2% to Xstrata’s closing share price of 1 119.50p and about 27.9% to Xstrata’s volume-weighted average share price of 1 008.91p over the three-month period ended February 1.

Commenting on the proposed merger, Davis said that the commodities value chain was becoming longer and more complex, which created opportunities for a company that can pre-emptively participate at every stage.

“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,” he stated, adding that increased scale and diversity would improve Xstrata’s risk profile, enhance access to capital markets and allow it to participate in industry consolidation.

Glasenberg reiterated the optimism: “We have a fantastic opportunity to create a new powerhouse in the global commodities industry. The merged company will be the most diverse major resource group, combining two complementary project portfolios and pipelines with the best commodities marketing business in the world.

“This is a natural merger that will realise immediate and ongoing value from marketing the combined group’s products to maximise arbitrage opportunities, blending, swapping and storing to meet customer needs more exactly. But the opportunity is even greater than that.

“Working together, we will be able to provide customers with greater security of supply and a broader range of products and services,” he stated.

The merged entity would be a major producer and marketer of 18 commodities. It would be the global leader in export thermal coal, ferrochrome and integrated zinc production, as well as the third-largest producer of copper, growing into the biggest independent producer in four years.

Last week, Xstrata confirmed that it was in discussions with its major shareholders about a possible all-share merger of equals.

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