Commodities trader Glencore's takeover of mining group Xstrata will face European Commission antitrust scrutiny, the companies said on Friday, kicking off a global regulatory process that could take months.
In a statement that follows a period of negotiation, the two firms involved in the proposed $90 billion (56.7 billion pounds) combination said they had agreed to officially notify the commission about the deal.
That notification, once it has been acknowledged by the commission itself, leaves the regulator with 25 days to decide whether to approve, reject or begin an in-depth probe into the plan to create the world's fourth-largest miner.
It is just one of a series of antitrust hurdles the two companies will have to clear.
Some in the industry had expected Glencore and Xstrata to largely sidestep the EU antitrust process -- and a possible probe -- as Brussels has in the past considered the companies to be a single entity for the purposes of competition rules, given Glencore's longstanding 34 percent holding in Xstrata.
But lawyers and industry sources had cautioned it was unlikely the Commission would pass on the opportunity to lift the lid on the largest mining takeover deal to date. Even if that means apparently contradicting a ruling from as recently as 2006, when Xstrata bought miner Falconbridge.
In Xstrata/Falconbridge the Commission said that Glencore already controlled Xstrata. So it's surprising that now it accepts to review Glencore/Xstrata, antitrust lawyer Ianis Girgenson at Covington & Burling said on Friday.
I don't think this has ever happened before. The Commission usually doesn't want to contradict itself, though it can always find a way around the issue, for example by saying that conditions have changed since 2006.
After talks with the companies, the Commission told the parties on Thursday that it required official notification of the merger, potentially implying it considers the two as separate companies and will therefore examine the deal, instead of leaving it to go to individual member states -- a lengthier and potentially more complex process.
Glencore and Xstrata said in a statement they would notify the Commission under EU merger regulations. That could take weeks, as the companies and Brussels go through what are often lengthy pre-notification discussions.
The parties expect the merger between Glencore and Xstrata not to result in any negative impact on competition in the commodity markets in which the two companies operate, the two sides said in a statement.
In fact, the merged firm is expected to be able to offer customers a wider range of products and services and provide improved security of supply to satisfy customer demand.
The office of Competition Commissioner Joaquin Almunia declined to comment, as it has yet to be officially notified.
The long-awaited deal to tie up Glencore and Xstrata will control significant shares in the market for some key commodities, but is not expected to face major antitrust issues given the number of other players involved in each market.
Glencore and Xstrata combined become the world's largest thermal coal exporter, and the largest producer of both zinc and ferrochrome. But the picture is complex -- in thermal coal, Glencore and Xstrata's export capacity is the largest, but less than 10 percent of the global total -- well below the threshold deemed significant by most antitrust authorities.
Whilst the combination gives the merged entity dominant global positions in mined supply (#3 copper, #1 zinc, #1 thermal coal), our initial take is no commodity concentration should raise a red flag, analysts at Liberum said.
Glencore alone already has large shares of the accessible market for the supply of thermal coal, oil, copper and zinc, and has operated without antitrust interference.
The sheer number of authorities it needs to negotiate with, however, is likely to add to an already lengthy deal timetable.
And Almunia has a track record that shows he will be no pushover in one of the highest profile deals of recent years, with steelmakers, influential in EU circles, already agitating.
Previously in charge of Economic and Monetary Affairs, Almunia was appointed to the competition brief in 2010. This month he blocked the merger of Deutsche Boerse and NYSE Euronext -- his second veto, despite opposition from Michel Barnier, the EU's financial regulation chief, and intense lobbying by the exchanges.
Yet his decision to allow Google to acquire Motorola Mobility last week, even though he was concerned the deal could lead to possible antitrust abuse, showed that he can be convinced by strong competition arguments by companies.
(Additional reporting by Julien Toyer in Brussels; Editing by Mike Nesbit and Andrew Callus)