Glencore International Plc, the commodities trader in talks to combine with Xstrata Plc, may need to offer as many as three of its shares for each one in the coal and copper producer to strike a deal.
Glencore, which already holds 34 percent of Zug, Switzerland-based Xstrata, may offer as much 25.3 billion pounds ($40 billion) of its stock for the rest. That’s based on the companies’ London close on Feb. 1, the day before Xstrata disclosed the approach, and the 23 percent average premium paid in 2011 mining deals, according to data compiled by Bloomberg. An Xstrata share is currently valued at about 2.66 in Glencore.
A Glencore-Xstrata combination would create an $82 billion rival to BHP Billiton Ltd. in the industry’s largest deal. It would be the world’s biggest producer of zinc, lead and thermal coal and a top-five producer of copper and nickel, according to UBS AG. Glencore may generate $1 billion in savings from the deal, allowing it to pay a 20 percent premium, based on share prices prior to Feb. 1, UBS said today.
“The current ratio implies a 14 percent premium, but whether this is palatable for Xstrata shareholders remains to be seen,” London-based Liberum analysts Ash Lazenby, Dominic O’Kane and Richard Knights said in a report. “Our sense is that the current ratio appears about correct and we believe that a deal could be struck in the 2.7 to 2.8 range.”
Merger of Equals
Still, under a so-called merger of equals where both sets of shareholders end up controlling 50 percent of the combined group, Glencore would need to offer 3.63 of its shares for each of Xstrata’s, Sylvain Brunet, an analyst at Exane BNP Paribas, said today in a report.
“A nil-premium merger would make no sense for Xstrata’s shareholders, given the limited synergies involved,” Paris-based Brunet said. A 39 percent premium would need to be offered to result in equal ownership, he said. “A share deal with Xstrata would require a hefty premium.”
The companies, which started their talks before Christmas, are discussing a merger of equals through a “scheme of arrangement,” according to two people with knowledge of the negotiations. That would prevent Glencore from voting the 34 percent stake it already owns in Xstrata when the plan is put to shareholders for approval. It also gives Xstrata holders greater leverage to demand better terms.
A Glencore spokesman declined to comment.
A merger would give Glencore coal, copper and nickel mines from Africa to Asia. Glencore, located two miles away from Xstrata in Baar, is required to announce a firm intention to make an offer by 5 p.m. on March 1 under U.K. takeover rules, Xstrata said yesterday.
Xstrata rose 9.9 percent yesterday and 4.3 percent today, closing at 1,283 pence in London for a value of 38 billion pounds. Glencore advanced 4.5 percent to 482.55 pence.
“The deal has to be initiated by Glencore and the premium paid would have to be one that Xstrata’s shareholders cannot refuse,” BNP Paribas’s Brunet said. “Any premium greater than 30 percent to yesterday’s close would leave Glencore below the control level; this might prove a deal-breaker.”
Mining takeovers are accelerating as companies struggle to replace depleting deposits and China’s industrial growth stokes metals demand for construction, cars and appliances. Glencore made an approach regarding an all-share merger of equals, Xstrata said yesterday. Glencore said there’s no certainty of an offer.
Global mining deals swelled to $98 billion last year, the highest level since 2007, from $76 billion in 2010, according to data compiled by Bloomberg. The average ratio of Glencore to Xstrata shares was 2.44 in the six months before this week’s announcement, according to data compiled by Bloomberg.