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Glencore forced to dig deeper for Xstrata

by Paul Whitfield  |  Published February 6, 2012 at 12:20 PM
Glencore International plc might offer a premium of between 8% and 12% for mining company Xstrata plc, after shareholders and analysts expressed surprise at mooted plans for a merger of equals.

The Swiss-based commodities trading giant could unveil a bid of 2.8 of its shares for each Xstrata share as soon as Tuesday, Feb. 7, according to the Financial Times. That would equate to a premium of about 8%, based on the companies' share prices Feb. 1, the day before talks were revealed. "We have no comment on the process as talks are ongoing," Glencore spokesman Humza Vunderman said.

Xstrata said Feb. 2 that Glencore had approached it with an "all-share merger of equals," suggesting that the deal might not come with a premium. That angered minority shareholders of Zug, Switzerland-based Xstrata, including fund manager Schroders plc, which view the deal as a Glencore takeover and want a corresponding premium.

Analysts, meanwhile, have questioned the implied assumption that the two companies are equals.

"For the two firms to be deemed true equals in value ... one must be willing to 1) assign a rather hefty free cash flow multiple to Glencore's marketing operations and 2) accept the substantial country risk embodied in Glencore's mining operations," Morningstar Inc. analyst Daniel Rohr noted.

Xstrata shares traded late morning Monday in London at 1,248 pence ($19.68), down 35 pence, or 2.7%, on Friday's close, though they are up almost 12% since it announced Glencore's approach on Feb. 2. Glencore shares have also climbed since the talks were revealed, gaining about 8% to trade Monday at 464 pence. Based on those share prices, a Glencore offer of 2.8 shares values Xstrata at an implied 1,299 pence, a roughly 4% premium to the target's share price.

A Tuesday merger announcement would coincide with Xstrata's 2011 results.

Glencore publishes its annual results on March 5.

"There will be a lot of attention on the business plan, the synergies they are forecasting and what problems they may have from the regulators," said a Paris-based fund manager who asked not to be named. "It would also be nicer to have some more info on Glencore, particularly its marketing operations, so we knew how to value it."

The combined group could realize about $468 million a year in annual savings and synergies following the deal, according to Credit Suisse Group analysts. Much of those benefits would come from Glencore taking over the marketing of Xstrata's mining output.

Glencore already owns 34% of Xstrata and a merger of the two companies had been widely regarded as a question of when, not if, following the trading company's $10 billion initial public offering in May.

Since the IPO, Xstrata's market capitalization has generally been larger than its would-be partner, with the exception of a brief periodlast fall. Based on Monday share prices, Xstrata has a market capitalization of £37.1 billion. Glencore's market capitalization was £32.1 billion.

Glencore's existing holding in Xstrata means that Glencore's shareholders would hold about 56% of the combined group.

The Financial Times, whose report cited people familiar with the situation, said the deal would take the form of a scheme of arrangement, requiring the approval of the holders of 75% of both companies' shares. Glencore will be excluded from voting its shares in Xstrata, meaning that opposition from Xstrata shareholders owning just 16% of the company would be enough to block the deal.

A premium in the range of 8%, while reported by the FT as bigger than expected, would still be well below the average mining industry takeover premium. A second British paper, the Daily Telegraph, claimed that Glencore was considering a premium in the range of 11% to 12%.

BHP Billiton Ltd. offered a 32% premium when it bid $40 billion for Canada's Potash Corp. of Saskatchewan Inc. in 2010. Xstrata offered a 42% premium when it launched its £5 billion bid for platinum mining company Lonmin plc in 2008. Xstrata might, however, point to its own 2009 zero-premium offer for Anglo American plc, though it abandoned that offer following opposition from the target.

While several institutions hold shares in both Glencore and Xstrata, and are thus expected to back a deal, the threat of opposition appears to have given Xstrata an upper hand as it seeks concessions on price and on the construction of the merged entity's board.

Xstrata board members will take a majority of positions on the board of the combined entity, according to reports. Glencore's management is expected to take second place to Xstrata executives in the combined company, with Xstrata chairman John Bond, chief executive Mick Davies and CFO Trevor Reid all expected to retain their positions. Glencore CEO Ivan Glasenberg, who will be the largest shareholder in the combined group, is likely to take up a deputy position, according to Reuters.

Management of both groups will likely devote much of their immediate time to negotiating the deal past global regulators, with the European Commission and the Chinese authorities expected to take leading roles in probing the transaction.

Xstrata and Glencore might have hoped to escape an EC inquiry into their merger. Europe's competition watchdog in 2006 ruled that the close links between the two companies meant they should be treated as one entity, though a report in the Daily Telegraph claimed that the EC expects to review the merger.

China, a key market for both Glencore and Xstrata, requires that any deal in which the combined revenue of the participants exceeds 10 billion renminbi ($1.55 billion) must be put before its competition commission.

Tags: commodities | Europe | Glencore International | industrials | merger of equals | Xstrata

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