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Glencore, Xstrata outline terms of $90B union

by Paul Whitfield | Published February 7, 2012 at 10:14 AM

Glencore International plc, the world's No. 1 commodities trader, has agreed to pay £39.1 billion ($61.9 billion) in shares for mining company Xstrata plc, setting in motion the largest-ever mining sector takeover and a battle with disgruntled Xstrata shareholders.

Glencore will offer 2.8 new shares for each Xstrata share, equivalent to 1,290.1 pence per share, based on Glencore's Monday closing price. That equates to a 15.2% premium to Xstrata's per-share price of 1,119.5 on Feb. 1, before the companies announced they were in talks. The premium drops to 8% when based on Glencore's own share price on Feb. 1.

The deal, which is being touted as a merger of equals, will leave Glencore shareholders with a 55% stake in a new business that will have a market capitalization of about $90 billion, sales of $209 billion and Ebitda of about $16.2 billion. It values Xstrata at about 5.3 times its Ebitda of $11.7 billion for 2011.

"Increased scale and diversity will improve our risk profile, enhance access to capital markets and allow us to participate in industry consolidation," said Xstrata CEO Mick Davis, who will be CEO of the combined group, in a statement. "It is the logical next step for two complementary businesses, each with an outstanding track record of shareholder value creation, entrepreneurial management and a proven ability to spot valuable opportunities and capitalize on them."

Based on a $90 billion market capitalization, the combined group would rank as the world's No. 4 mining group, ahead of Anglo American plc and behind Brazil's Vale SA.

The emergence of a new player at the top table of global mining, and the creation of a new type of company that gives equal weight to commodities trading and mining, could drive further consolidation in a sector that has been one of the most active deal arenas for the past few years.

Glencore CEO Ivan Glasenberg told an analyst call on Tuesday that he would lead the combined company's dealmaking operations, while Xstrata's Davis would take on the principal responsibility for operational management.

"There is no doubt that the combined entity...facilitates us looking at deals that would have been challenging on a standalone basis," added Davis on the conference call. "The advantage of that scale is also that we can take on more risk in countries where we might have previously limited our exposure."

A Glencore merger with Xstrata has been considered since shortly after the two companies parted company in 2002, when Xstrata bought South African and Australian mining assets from Glencore for $2.5 billion before floating on the London and Hong Kong stock exchanges. Analysts have long joked that Glencore executives settled on Xstrata's name as short hand for exit strategy.

The merger will be implemented via a scheme of arrangement, requiring the support of the holders of 75% of both companies' shares. Glencore will not be allowed to vote its shares in Xstrata, meaning that opposition from holders of just over 16% of Xstrata's share capital would be enough to halt the deal.

The backlash against the offer was already under way Tuesday morning.

Standard Life Investments Ltd., Xstrata's fourth-largest shareholder with just over 2%, said "it sees some merit" in the combination but would vote against the offer which "clearly undervalues" Xstrata's assets and potential. Schroders plc, a second U.K. fund manager with a stake in Xstrata, was also planning to vote against the deal.

"This is a fabulous deal for Glencore, it's probably a great deal for the Xstrata management, but it's a poor deal for Xstrata's shareholders," Schroders' head of U.K. equities Richard Buxton told Reuters on Tuesday.

Analysts also expressed doubts about the takeover premium on the conference call on Tuesday morning.

"A typical [mining sector] takeover premium is about 30% and Xstrata's own takeover premium is typically 30% to 33%," said HSBC Holdings plc analyst Andrew Keen.

Davis and Glasenberg defended the premium, claiming that an inflated premium for Xstrata would destroy value for both companies. "This is a share-for-share deal," Davis said. "Why should one set of shareholders be advantaged?"

Moody's Investors Service Tuesday placed the ratings of both companies, as well as their guaranteed subsidiaries, on review for possible upgrades because of "Moody's favorable assessment of the planned merger in terms of diversification and synergies, as well as the uncertainties surrounding

the final details and execution of the proposed transaction."

Glencore's Glasenberg will take on the role of Deputy CEO and President. Xstrata CFO Trevor Reid will retain his role at the combined group, as will Xstrata chairman John Bond. As well Davis, the board will also include four non-executive directors from each of Xstrata and Glencore's existing boards.

The new group will be called Glencore Xstrata International plc. It will be headquartered in Switzerland and listed on both the London and Hong Kong exchanges.

The combined operations will benefit from "estimated annual Ebitda synergies of at least $500 million in the first full year," the companies said. The deal is expected to be earnings accretive from the first year.

Davis said that the deal would be filed with regulators in the U.S., China, South Africa and Australia. In addition, the companies expected to have to file the plans to European regulators on an individual country basis but were waiting on guidance from the European Commission.

The companies expect the regulatory reviews to be completed by the third quarter of this year. Davis said that he did not foresee any significant problems or the need to sell assets to win approvals.

Shares in Xstrata traded Tuesday morning at 1,234.5 pence, down 27 pence, or 2%, on their previous close. Shares in Glencore traded at 464 pence, up 3.25 pence, or just under 1%.

Glencore is taking financial advice from Citigroup Global Markets Ltd.'s David Wormsley, Simon Lindsay and Tom Reid as well as Morgan Stanley & Co. Ltd.'s Michel Antakly, Laurence Hopkins and Alastair Cochran.

Xstrata is taking financial advice from four banks. It tapped Deutsche Bank AG's Nigel Robinson, Khaled Fathallah and Nick Bowers; J.P. Morgan Ltd.'s Ian Hannam, Barry Weir and Neil Passmore; Goldman Sachs International's Brett Olsher and Luca Ferrari; and Nomura International plc's William Vereker, William Barter and Shaun Treacy.

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