* Key Takeaway
Now that the Xstrata acquisition has been fully integrated and Glencore is
entering a period of strong FCF, a Glencore bid for Anglo American could
be coming, as we have long expected (see our report from Feb 2013 here).
GLEN shares should outperform AAL shares in the medium term, but we see an
increasing possibility of Glencore buying Anglo next year. GLEN continues to be
one of our top picks in the sector.
* The strategic rationale for Glencore to bid for Anglo: When it acquired Xstrata
last year, Glencore 1) upgraded the quality of its asset portfolio and thereby reduced the
cyclicality of its earnings, 2) increased the amount of control it has over the supply of
commodities, 3) provided more feed to grow its trading business, and 4) unlocked value
from synergies. We would expect the same benefits to result from a Glencore acquisition of
Anglo American. Media reports have speculated about a potential combination of these two
companies for the past two years. Anglo's CEO, Mark Cutifani, commented in a WSJ story
just yesterday that Anglo is open to a takeover if the price is right. Our analysis indicates that
Glencore will be best positioned to do this deal if Glencore shares outperform Anglo shares
over the next 6-12 months, as we expect.
* Big synergy potential: We estimate that a Glencore acquisition of Anglo would create
at least $1.5bn of operational and revenue synergies per year. Our analysis indicates that
an offer of 5.3 GLEN shares for each AAL share (we would not expect Glencore to offer any
cash) would be about 12% EPS accretive for Glencore by year 3. This merger ratio would
imply a 25% premium to Anglo's current share price. If Glencore shares outperform, the
required ratio to get to a 25% premium would decline, and a deal could get done at a ratio
closer to 5.0.
* Antitrust risk is manageable but not immaterial: As we discuss in detail herein,
antitrust risk relating to a Glencore acquisition of Anglo could be an issue in platinum,
copper, and South African coal. However, structural remedies could overcome these hurdles.
* White knights unlikely to emerge: Our analysis indicates that a white knight for Anglo
will not emerge, although Rio cannot be totally ruled out. The lower the probability of a
white knight emerging, the more likely it is that Glencore acquires Anglo.
* Valuation/Risks
Glencore is one of our top picks in the sector. The main risks for the company are operational,
financial and macro (China). GLEN trades at a 2015E P/E of 13.3x and EV/EBITDA of 8.1x.