LONDON Top commodity trader Glencore's planned $12 billion London listing has long been seen as the first step to merging with Xstrata XTA.L, in what could be the biggest mining takeover in history.
The question for most analysts and investors since the IPO was confirmed on Thursday is not if the deal happens but when -- and how.
Glencore, which is set to list next month, has made no secret of the fact that acquisition firepower is one of the main motivations behind its decision to go public after 37 years and it has no plans to abandon the opportunistic dealmaking that has made the company's fortunes.
Already the world's largest diversified commodities trader, Glencore is eyeing up deals to boost its presence in the iron ore sector, as well as coal, ferroalloys, oil and agriculture -- potentially lucrative but still its smallest segment.
Targets there could include Louis Dreyfus, an agricultural trading firm in a state of flux after the death of its main shareholder [ID:nLDE73427T].
But Xstrata, the Swiss miner in which Glencore GLEN.UL already owns 34 percent, is seen as its number one target.
Glencore Chief Executive Ivan Glasenberg has already said publicly that he sees value in a deal.
Meanwhile, Xstrata CEO Mick Davis has told analysts the prospect of having both an independently listed Glencore and an independently listed Xstrata is "unsustainable" -- a reference to the fact Glencore's holding in Xstrata does not attract its full market value as part of a broader conglomerate.
Tim Dudley, an analyst at Collins Stewart, said the biggest mining groups in the world, such as BHP Billiton (BLT.L), were heaping pressure on smaller competitors such as Xstrata and Anglo American (AAL.L).
"It is not a matter of whether the combined group will be earnings accretive -- the advantage here, and probably what the companies generally agree on, is that it is best to have scale," Dudley said.
"Even the likes of Xstrata and Anglo are getting left behind by the likes of BHP and bigger mining companies. Joining together rapidly increases their scale and their ability to compete with BHP, which has run ahead."
Xstrata shareholders have so far pressed the group to wait for a Glencore listing before considering a bid and have fretted that they will be taken out in a sweetheart deal.
Any offer would most likely be in shares in an enlarged group -- where Xstrata shareholders could continue to benefit from its expanding ambitions -- with Glencore partners forced to swallow the necessary dilution, something sources familiar with the matter say they would be happy to accept.
Buying all of the outstanding shares in Xstrata at current market prices and without a premium, as expected by the market given the nature of the deal, would cost around 28 billion pounds ($45.82 billion). It would also take on Xstrata's net debt, which stood at $7.6 billion at end-2010.
That would make it the sector's biggest deal, trumping Rio Tinto's (RIO.L) acquisition of aluminum producer Alcan in 2007 -- although several even larger deals have fallen through.
Alternatively, Glencore could just buy an extra 15 to 20 percent to wrest control of Xstrata -- not necessarily a tough prospect as for example BlackRock, holders of Glencore's convertible bond, are the second-biggest shareholders in Xstrata with a stake of around 6 percent.
"Glencore would probably wait a quarter or two to establish a fair market price for Glencore before they start any proceedings to buy Xstrata," Nik Stanojevic, analyst at Brewin Dolphin said.
"I would guess at least a quarter or two of results and of production and so on to get the market comfortable."
That could mean a deal within 12 months.
Further down the line, analysts say the enlarged group could turn its eye to rivals including Anglo (AAL.L), currently trading at a substantial discount to its sum of the parts valuation -- 50 percent according to analysts at Bernstein Research -- but still a substantial deal at around $90 billion, including takeover premium.
If Glencore decides against Xstrata, analysts expect it to look at other large-cap miners including Anglo or Kazakh miner ENRC ENRC.L, one of the world's biggest producers of stainless steel ingredient ferrochrome.
Glencore would attempt to buy a stake in ENRC rather than try a takeover given the firm's share structure and the fact the Kazakh government would have to clear any bid, experts say.
ENRC's founders hold around 35 percent and Kazakh sovereign wealth fund Samruk-Kazyna has an 11.65 percent holding.
Fellow FTSE-100 miner Kazakhmys (KAZ.L) has a 26 percent stake -- worth about $5 billion at current market values -- and has said all options for the stake are being considered.
"There is no doubt that Glencore would like that stake," Rob Edwards, managing director of metals and mining research at Renaissance Capital said. "Glencore are already huge in ferro nickel and ferroalloys, they see ENRC's price realization as being sub optimal and think they can do a better job."
Beyond the mega-deals, Glencore will continue to build up its presence in markets that it sees as having growth potential -- from grains to oil and coal -- snapping up assets opportunistically thanks to its presence on the ground in the world's most mineral-rich spots.
(Additional reporting by Quentin Webb; editing by Sophie Walker)