Glencore International Plc (GLEN) is continuing to stick to the terms of a $33 billion bid for Xstrata Plc (XTA), resisting mounting pressure from shareholders to sweeten the offer four days before investors vote, according to a person with knowledge of the matter.
Glencore didn’t hold negotiations with Qatar Holding LLC, the biggest opposing shareholder, on the weekend and none are scheduled, according to the person, who asked not to be named because the matter is private. Should its current proposal fail, executives are considering a structure for a new offer that would be more difficult to block, the person said.
Opposition to Baar, Switzerland-based Glencore’s all-share offer made in February intensified last week when Qatar Holding, owner of 12 percent of Xstrata, confirmed it would vote against the current terms on Sept. 7. Glencore owns 34 percent of Xstrata and wants the rest of the coal, copper and zinc producer to create the world’s fourth-biggest mining company.
“Pragmatically it would make sense for Glencore to bump slightly and move on,” Myles Allsop, an analyst at UBS (UBSN) AG in London, said today. “It’s risky because Qatar is a long-term shareholder and is likely to be patient. If Glencore decides to come back in 12-18 months time, Glencore will still have to convince Qatar and other dissenters of the relative value.”
The lack of talks on the final weekend before shareholders vote heightens the prospect of the deal collapsing. Under the proposal, known as a scheme of arrangement, just 16.48 percent of Xstrata shareholders can block the transaction, while Glencore isn’t allowed to vote its stake.
Glencore is considering returning with an offer structured as a more conventional takeover should the current plan fail this week, the person said. That would reduce the level of acceptances needed to complete a deal to more than 50 percent, compared with 75 percent using a scheme of arrangement.
Under U.K. takeover rules, Glencore would typically be barred from returning with an offer for a year. It could only return within the 12 months with the agreement of Xstrata and the Takeover Panel, or in the event a rival bidder emerges.
“It is unlikely that Xstrata’s board will recommend a switch from a scheme to a tender offer over the next 12 months,” UBS’s Allsop said. “If you are going hostile, you’d have to wait for 12 months and you have to pay a premium. It moves from a merger of equals to a takeover. It’s a tricky one.”
Charles Watenphul, a spokesman for Glencore, declined to comment, while an Xstrata spokesman also wouldn’t comment. Qatar officials weren’t immediately available to respond.
Glencore rose 0.8 percent to 388.15 pence by the close in London. Xstrata fell 0.5 percent to 947.20 pence. Xstrata is trading at a ratio of 2.44 times that of Glencore, compared with the current bid of 2.8 shares for each of Xstrata’s.
Glencore’s billionaire Chief Executive Officer Ivan Glasenberg, 55, is the largest shareholder of the commodities trader with about 15.7 percent. Glasenberg has repeatedly rebuffed calls to raise his offer, saying on Aug. 21 that he was ready to move on from the transaction rather than overpay.
“The question really boils down to whether they believe it is better to do the deal now or later,” Jefferies Group Inc. said in an Aug. 31 note to clients. “Ivan Glasenberg’s reputation for standing firm in a negotiation is unrivaled.”
The all-stock deal for Baar, Switzerland-based Xstrata was agreed to between the two companies in February, with Xstrata’s Mick Davis lined up to be the combined company’s CEO and Glasenberg his deputy and president.
Knight Vinke Asset Management LLC, the New York-based activist fund, also said last week it intends to vote against the proposal on its current terms. Schroders Plc (SDR) and Standard Life Investments (SLGLDIA) have said they would vote it down.
The chance of success was sliding below 30 percent, Liberum Capital Ltd. said Aug. 29. The initial offer was made at an 8 percent premium, the second-lowest for any mining deal worth more than $5 billion, according to data Bloomberg compiled.
The cost of insuring against default on debt sold by Glencore rose by the most among 125 investment-grade companies in the Markit iTraxx Europe Index today. Credit-default swaps on Glencore rose 14 basis points to 352, the highest since June 29, and Xstrata rose 2 basis points to 210.5 basis points.
Opposition to the bid had grown to about 15 percent of Xstrata investors after the Financial Times reported last month that Norway’s sovereign wealth fund, with 3 percent of Xstrata, planned to block the deal with Qatar, Liberum said. UBS said Aug. 20 it saw a 60 percent chance of the deal being voted down.
Qatar Holding said Aug. 30 that while it supported the deal in principle, it wouldn’t vote in favor under the current terms.
The Qatari fund “believes that Xstrata has a strong future, whether in combination with Glencore on acceptable terms or as a stand-alone entity, and that its shares represent an attractive long-term investment,” it said.
Glencore met with Qatar in late June after the fund said an offer of 3.25 Glencore shares was “more appropriate.”
At the same time, Xstrata moved to defuse objections from its own investors, some of whom criticized the 172.8 million pounds ($275 million) of retention payments it planned to pay 73 of its executives.
They include CEO Davis, 54, who stands to receive 28.8 million pounds of shares over three years. The terms of the payments were altered on June 27, linking some to performance and converting bonuses to shares rather than cash.
Xstrata shareholders other than Glencore would hold 45 percent of the combined entity, to be known as Glencore Xstrata International Plc and listed in London and Hong Kong, the companies said in February. It would be based in Switzerland.
Xstrata is working with Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Deutsche Bank AG and Nomura Bank International Plc as financial advisers. Glencore, which had agreed to pay Xstrata a so-called break fee of 298 million pounds should it withdraw the offer, tapped Citigroup Inc. (C) and Morgan Stanley. (MS) Qatar Holding has been advised by Lazard Ltd. (LAZ)
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