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Glencore And Xstrata Agree $90bn Tie-up « Back
Selina Harrison, November 2012
Anglo-Swiss commodities firms Glencore International and Xstrata agreed in October to come together to create a group with a combined market value of $90bn (£57bn). Although, the ‘merger of equals’ would create the seventh biggest firm on the FTSE 100, the deal, which was announced in February, met strong opposition from Xstrata’s shareholders and was sweetened in its latter stages to secure their support. With shareholders appeased, antitrust regulators in the European Union have now begun reviewing the deal, which, along with scrutiny by regulators in China and South Africa, is one of three regulatory hoops that Glencore has left to clear before the transaction is closed.

Glencore is the world’s biggest commodities trader, with products including oil, coal, gold and foodstuffs. Anglo-Swiss firm Xstrata is the world’s fourth largest diversified miner, producer of copper, nickel and zinc, and exporter of thermal coal.

The deal comes after five years of attempts to combine the two companies by Ivan Glasenberg, the South African billionaire who runs Glencore, and Xstrata chief executive Mick Davis.

Friends for decades after studying together at university in South Africa, they codenamed the merger plan ‘Everest’ in a nod to a joint Himalayan expedition they took together a few years ago.

Mr Glasenberg, a former coal trader worth an estimated $7.2bn (£4.5bn) according to the latest Forbes rich list, owns 15.5 percent of Glencore. He led the company to a £38bn flotation in London in May 2011, which transformed him and four other partners into billionaires overnight. However, it was widely acknowledged that the motivation for the offering was to gain a fair market valuation of Glencore to allow the Xstrata deal to go ahead.

On 2 February, when news circulated that the two companies had once again ignited merger talks, shares in Xstrata rocketed almost 10 percent, closing at £12.30 in London trading. Glencore shares were up almost 7 percent at £4.61. Already in ownership of 34.4 percent of Xstrata, Glencore said it would buy the remaining two-thirds of the company for an agreed $26.1bn (£16bn). In the all-share deal, Glencore said it would issue 2.8 new shares for each Xstrata share. The deal valued Xstrata at around £39.1bn or £12.90 a share – a 15.2 percent premium over Xstrata’s closing price the week before merger talks were announced. The enlarged Glencore would have around 12.6 billion shares, of which Xstrata shareholders other than Glencore would own 45 percent.

According to Financial Times (FT) calculations based on data released by the two companies, the merger of Glencore and Xstrata would create a mining giant with a dominant position in commodities including thermal coal, zinc and lead. The combined group would control about 30 percent of internationally traded thermal coal, supply over 30 percent of the seaborne market – essential for fuelling the power stations of Japan, South Korea and China, and would become the world’s largest producer of zinc, lead and ferrochrome, which is used in the production of stainless steel. The merger would create a business with $209bn in sales and rank as the world’s fourth largest mining group by market capitalisation, behind BHP Billiton, Vale of Brazil and Rio Tinto.

In an interview with Sky News on 2 February, Mr Davis, who had been appointed the boss of the enlarged Glencore, said “a merger between Glencore and Xstrata offers a unique opportunity to create a new business model in our industry to respond to a changing environment. It is the logical next step for two complementary businesses.” However, the deal was dealt a major blow when two of Xstrata’s largest independent shareholders announced their opposition.

David Cumming, head of equities at fund manager Standard Life, which held about 2 percent of Xstrata shares at the time, said in a statement, “...the proposed exchange ratio clearly undervalues Xstrata’s assets and future earnings contribution. Consequently, it is our intention to vote against the deal unless the merger terms for Xstrata shareholders are materially improved.” Richard Buxton, head of equities at Schroders, which held 1.5 percent of Xstrata shares, concurred. “It is not compelling or attractive for Xstrata shareholders and we will vote against,” he said. “If they keep describing it as a merger of equals, why don’t Xstrata shareholders get 50 percent?”

Despite increasing shareholder opposition to the deal, for many months Mr Glasenberg remained defiant in his refusal to increase Glencore’s bid for its target. In an interview with the FT on 5 March, he attempted to challenge the view of Xstrata’s dissident shareholders and gain some understanding for his approach. “Historically, mergers of equals are not made at a premium. Why this one should be different? Well, it is different because we are already paying a premium,” he stated.

During March, Glencore would conduct a two-week road show addressing Xstrata’s 20 top shareholders in an effort to garner support for the deal, or, according to Mr Glasenberg, “to convince the naysayers that do not understand Glencore”. Figures used in the road show disclosed that during the first quarter, higher commodity prices lifted Glencore’s net income – before exceptional items from its mines and other production assets including its 34 percent stake in Xstrata – to $4.06bn, up 7 percent on the same period last year. Glencore said it had lost more than $330m in cotton trading due to exceptional volatility in prices, but revenues rose to $186bn, up 28 percent from $145bn over the same period.

Even so, with the exception of investment management corporation Blackrock, most of Xstrata’s other top investors had been critical of the merger deal and the terms that Xstrata agreed. Instead of the 2.8 Glencore shares for every one share they own, in their eyes the proposed terms did not reflect the long term earnings potential of the miner versus the volatility of the commodities trader. Many Xstrata owners demanded 3.6 Glencore shares. Investors were also particularly angered by the hefty packages offered to retain top executives at Xstrata, including an extra £29m over three years to keep Mr Davis as leader of the new entity.
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