M&A regulation Chinese style: Restrict a merger, invest in the aftermath

Peruvian president Alejandro Toledo holds a symbolic check for $45.5 million from Xstrata in 2004.
Peruvian president Alejandro Toledo holds a symbolic check for $45.5 million from Xstrata in 2004.
Image: Reuters/Oscar Paredes
We may earn a commission from links on this page.

Mergers and acquisitions are supposedly all about synergy between the companies involved. It’s unusual to see it blossom between a company and an antitrust regulator, yet that’s exactly what seems to have happened in the case of the Chinese government and the Switzerland-based mining group Glencore-Xstrata.

The merger of Glencore and Xstrata created the world’s fourth-largest mining company and largest commodities trader when it was finalized last year. But as a condition of the deal, the firms had to secure the blessing of regulators in the major markets in which they operate, including China.

Before bestowing its approval, China’s Ministry of Commerce took an expansive view of its remit, insisting that the company sell its giant Las Bambas copper mine in Peru in order to gain approval for its merger. Today, after months of negotiations, the Las Bambas sale was finally sealed, and the buyer was none other than a consortium of state-owned Chinese firms led by China Minmetals, which agreed to pay at least $5.8 billion in cash for the mine. The price is at the higher end of most analysts’ estimates, who welcomed the cash windfall on Glencore Xstrata’s debt-heavy balance sheet.

The sale highlights how desperate China is to secure an uninterrupted inflow of metals and raw materials to fuel its economy. As the Financial Times noted, Minmetals was founded during the Western trade embargoes against China in the 1950s. The Las Bambas takeover is part of a resource security strategy that is designed to make sure a similar resource choke point never happens again, particularly with copper, since China consumes 40% of the world’s supply of the mineral.

Copper demand is currently in the doldrums (paywall), although Chinese imports have continued unabated since the metal is often stockpiled for use as loan collateral.

Not many developed economies would so blatantly combine their regulatory and commercial interests at home and abroad (other than France). Such are the benefits of China’s one-party system, where competition regulation and foreign trade policy are often one and the same.