Glencore, Xstrata Merger on Epic Scale (GLNCY, XSRAY, BHP, VALE, RIO)

Last week’s announced $88 billion merger of Glencore International AG (OTC: GLNCY) and Xstrata plc (OTC: XSRAY) has been on the back burner for a long time. Perhaps the biggest reason for Glencore’s 2011 IPO was to build a war chest that would allow the trading house to make an offer for control of Xstrata, of which it owned about 34% at the time of the IPO. And the offer had to be one that Xstrata’s shareholders could not refuse.

Under terms of the deal, Gencore shareholders would own 56% of the combined companies, and would create a mining and trading company to rival BHP Billiton plc (NYSE: BHP), Vale SA (NYSE: VALE), and Rio Tinto plc (NYSE: RIO).

The most significant potential threat to the deal is the Xstrata shareholder vote. Glencore will not be able to vote its 34% of stock, and the remaining Xstrata shareholders have to approve the merger by a 75% margin. Thus, about one-sixth of Xstrata’s shareholders can block the merger.