Glencore $31 Billion Deal for Xstrata Looking Completed: Energy

Photographer: Gianluca Colla/Bloomberg

The logo of Xstrata Plc is displayed outside the building that houses the company's headquarters in Zug, Switzerland. Close

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Photographer: Gianluca Colla/Bloomberg

The logo of Xstrata Plc is displayed outside the building that houses the company's headquarters in Zug, Switzerland.

Glencore International Plc (GLEN)’s $31 billion bid for control of Xstrata Plc (XTA) has never looked so certain after the sovereign wealth fund of Qatar threw its support behind the biggest takeover of the year.

Qatar Holding LLC, the second-largest shareholder of the target, said it will back Glencore’s offer of 3.05 of its shares for each of Xstrata’s. Shares of Xstrata traded at 2.96 to those of Glencore in London today, the highest ratio on record and an indication investors expect the transaction to be completed.

“The deal has greater chance to succeed as Qatar is pivotal in the voting process,” Alain William, an analyst at Societe Generale SA (GLE), said in a report. The discount that Xstrata is trading at compared with the offer may narrow further “in the coming days,” William said.

The purchase will bring Glencore, a cotton-to-crude-oil commodities trader, Xstrata’s operations in mining coal, nickel, zinc and copper. The combined entity will have interests in about 35 coal mines in Colombia, Africa and Australia. It will account for about 10 percent of global seaborne exports of the fuel. Glencore handles 3 percent of the world’s daily oil consumption.

Glencore increased its bid in September after Qatar complained the previous price was too low. Investors in both companies will vote on the takeover at meetings in Zug, Switzerland, on Nov. 20.

Approvals Due

Completion is still subject to approvals from regulators including the European Commission, which has until Nov. 22 to rule. The companies have said they expect the transaction to be closed by the end of the year.

Qatar Holding, owner of 12 percent of Xstrata, said yesterday it intends to vote in favor of two resolutions that will approve the takeover. The first would back the deal along with 144 million pounds ($228 million) of retention bonuses for about 70 Xstrata employees. The second supports the acquisition without the incentives. Qatar plans to abstain on a third resolution that focuses solely on the payments for Xstrata managers.

“I see about 90 percent probability of the deal being voted through,” said Peter Davey, an analyst at SBG Securities Ltd. in London. “Given that one potential deal breaker -- the link between the retention vote and the merger vote -- is lifted, I would put a high probability of it going through.”

Fidelity Worldwide Investment, owner of about 0.6 percent of Xstrata, also supports the takeover, a person familiar with the matter said on Nov. 14.

Mining Assets

Glencore raised its bid by 8.9 percent on Sept. 7 from 2.8 shares proposed in February. Xstrata on Oct. 1 recommended shareholders back the revised deal and vote for bonuses to keep managers of its mining assets, which make about 80 percent of the combined company’s earnings.

Qatar “continues to see merit in a combination of the two companies and is satisfied with the terms of the proposed merger,” it said yesterday in a regulatory statement.

The offer remains opposed by some Xstrata shareholders, including Knight Vinke Asset Management LLC. Shareholder advisory groups are also divided. Pensions & Investment Research Consultants Ltd. recommended opposing the deal, citing a lack of due diligence and board independence at Xstrata, according to PIRC’s own guidelines. Institutional Shareholder Services Inc. and Glass Lewis urged investors to support it, while calling for the bonuses to be rejected.

Blocking Potential

Investors holding as little as 16.48 percent of Xstrata can block the transaction because U.K. takeover rules prevent Baar, Switzerland-based Glencore from voting its 34 percent stake in Xstrata. The first two proposals to support the combination -- with or without bonus payments -- must be backed by a vote of 75 percent.

The combined entity would produce about 134 million metric tons of energy coal next year, rising to 156 million tons by 2016, according to Macquarie Group Ltd. (MQG) estimates. Glencore increased its third-quarter coal production 82 percent after acquiring new operations in South Africa through the purchase of stakes in Optimum Coal Holdings Ltd. and Umcebo Mining Ltd.

“The combined unit makes a lot of financial sense,” SBG’s Davey said. “The combination materially upgrades the Glencore investors’ position in terms of operational project quality and financial strength so they get a good deal out of it.”

To contact the reporters on this story: Jesse Riseborough in London at jriseborough@bloomberg.net; Firat Kayakiran in London at fkayakiran@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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