Glencore Price for Xstrata Seen Rising Amid Threatened No Votes: Real M&A

To complete the mining industry’s biggest takeover, Glencore International Plc may need to double the premium it agreed to pay Xstrata Plc (XTA)’s owners.

Standard Life Plc (SL/) and Schroders Plc, two of Xstrata’s biggest shareholders, have already said they would vote against the merger if Glencore didn’t boost its all-stock agreement. Glencore, which owns 34 percent of Xstrata, offered 2.8 shares for each one of Xstrata’s this week. That ratio represents an 8 percent premium, the second-lowest for any mining deal worth more than $5 billion, according to data compiled by Bloomberg.

Glencore can afford to offer at least 3 shares, increasing the takeover premium for Xstrata to 16 percent, and still add to earnings, according to Jefferies Group Inc. While Xstrata Chief Executive Officer Mick Davis says a majority of shareholders he’s spoken to back the $37.6 billion “merger of equals,” RidgeWorth Capital Management Inc. says the deal to create the world’s largest producer of zinc, lead and coal used in power stations undervalues Xstrata by at least 20 percent.

“Xstrata is a prized asset,” Chad Deakins, an Atlanta- based international-equity fund manager for RidgeWorth, which oversees $47 billion including shares of Xstrata, said in a telephone interview. “To our view, they’re not offering much of a premium at all. They’re underpaying.”

Claire Divver, a spokeswoman at Xstrata, declined to comment on whether the merger agreement undervalued the Zug, Switzerland-based company. Simon Buerk, a spokesman for Glencore of Baar, Switzerland, didn’t immediately respond to telephone calls and e-mails sent outside normal business hours.

Acquisition Detail

Glencore said on Feb. 7 it had agreed to buy Xstrata in an all-stock deal currently valued at 23.8 billion pounds ($37.6 billion). The merger would create a business with $209 billion in sales by combining the largest publicly traded commodities supplier with the biggest exporter of thermal coal.

The new entity will also become one of the five biggest suppliers of copper and nickel, UBS AG said.

The deal brings together two groups that separated a decade ago when Xstrata bought Glencore’s Australian and South African coal mines for $2.5 billion and went public in London. The companies, which are located about two miles (3.2 kilometers) apart in Switzerland, will be known as Glencore Xstrata International Plc after the merger.

The share-swap ratio of 2.8 valued Xstrata at about 1,155.85 pence each, based on Glencore’s average price in the 20 days before news of the deal emerged on Feb. 2, according to data compiled by Bloomberg. That’s about 8 percent higher than the average price for Xstrata’s shares in the same span.

Shareholder Value

The premium narrows to 7.2 percent when comparing the companies’ share prices in the 20 days prior to the official announcement on Feb. 7, data compiled by Bloomberg show. That’s less than the average 30 percent premium for all mining deals valued at more than $5 billion since at least 1999.

Glencore won’t be allowed to vote its 34.1 percent holding in Xstrata on the merger, according to the U.K.’s takeover code, putting the final decision into the hands of the shareholders who control the rest of the company.

That means 16.48 percent of Xstrata’s shareholders hold the power to block the deal. Edinburgh-based Standard Life and Schroders (SDR) of London, who together hold more than 3 percent, say the proposed exchange ratio undervalues the company.

“Although we see some merit in the merger of Xstrata and Glencore, the proposed exchange ratio clearly undervalues Xstrata’s assets and future earnings contribution,” David Cumming, head of equities at Standard Life Investments, said in an e-mailed response to questions.

‘No Doubt’

“It is our intention to vote against the deal unless the merger terms for Xstrata shareholders are materially improved,” he wrote.

Richard Buxton, the head of U.K. equities at Schroders, also intends to vote the deal down, according to Estelle Bibby, a spokeswoman for the company.

To prevent Xstrata’s shareholders from rejecting the transaction, Glencore may have to raise its bid to at least 3 shares, according to Keith Moore, an event-driven strategist at MKM Partners in Stamford, Connecticut. Boosting the offer from 2.8 shares would still allow the combined company to add to earnings, Christopher LaFemina, an analyst at Jefferies, said in a report to clients dated yesterday.

“There’s no doubt in my mind that doing an 8 percent premium on this deal isn’t going to fly with shareholders,” MKM’s Moore said in a telephone interview.

Controlling Interest

Glencore could increase the ratio to 3.5 shares and still maintain a controlling interest in the combined entity that the companies say stands to add at least $500 million to earnings before interest, taxes, depreciation and amortization in the first year, according to Sachin Shah, a merger arbitrage strategist at Tullett Prebon Plc in Jersey City, New Jersey.

The current offer valued Xstrata at 6.2 times its Ebitda, the fourth-lowest multiple for a mining takeover greater than $5 billion, data compiled by Bloomberg show.

“You get zero if this deal doesn’t go through -- for you to give up a little more interest and still have a controlling stake over the minority shareholders, why wouldn’t you want to do that?” Shah said in a telephone interview. “You would still be reaping the majority of the benefits.”

Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC, says that Glencore may be reluctant to pay a premium for Xstrata because the companies have similar valuations and the deal was announced as a “merger of equals.”

Deal Logic

Glencore’s stock was valued at about 9.4 times analysts’ earnings estimates for the company this year, versus Xstrata’s multiple of 9.7 times earnings, data compiled by Bloomberg show.

Under the merger plan, Xstrata’s Davis, 53, will lead the combined company. Ivan Glasenberg, Glencore’s 55-year-old CEO, will be deputy CEO and president. The chairmanship and chief financial officer posts will also go to Xstrata’s John Bond and Trevor Reid. The board will include Davis, Glasenberg and four non-executive directors from each side of the deal.

“I’ve spoken to quite a few shareholders before we announced the deal,” Davis said in a conference call with U.S. analysts and investors. “The majority of the shareholders I spoke to were clearly behind the logic of the deal.”

Analysts still say that Xstrata may be worth more than the deal offer, which is currently valued at 1,216 pence. They estimate that the company’s shares may reach 1,343 pence in the next 12 months, estimates compiled by Bloomberg show.

Xstrata is worth as much as 1,500 pence a share in a takeover, according to RidgeWorth’s Deakins. That would still be less than its high of 1,550 pence in the last 12 months.

“If Glencore does choose to bump their offer to 3, they have a much better chance of closing,” Jefferies’ LaFemina said in a telephone interview. “Xstrata shareholders should be getting a premium to what they are being offered.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Charles Mead in New York at cmead11@bloomberg.net; Liezel Hill in Toronto at lhill30@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Simon Casey at +1-212-617-3143 or scasey4@bloomberg.net.

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