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Glencore’s $39 Billion Xstrata Offer Hinges on ‘Super’ 16%

Xstrata CEO Mick Davis
Michael "Mick" Davis, chief executive officer of Xstrata Plc. Photographer: Mark Graham/Bloomberg

The fate of Glencore International Plc’s 24.3 billion-pound ($39 billion) offer for Xstrata Plc, already opposed by some shareholders, hinges on a small minority of investors who can block the deal.

Xstrata shareholders accounting for just 16.48 percent of the company have the power to block the deal because U.K. takeover rules prevent Glencore from voting. That gives investors who oppose the takeover, including Standard Life Investments Ltd. and Schroders Plc, more leverage to force Glencore to sweeten terms of its offer.

“This is far from a done deal,” said Chris Searle, corporate finance partner at BDO LLP. “Two of the biggest shareholders have come out in public to say they’re unhappy. I’m sure there are more in private making the same point.”

While Xstrata’s chief executive officer, Mick Davis, said a majority of the shareholders he has spoken to back the bid, Standard Life and Schroders, who together hold 3.5 percent, said the proposed exchange ratio undervalues the company. Glencore offered 2.8 shares for each one in the Zug, Switzerland-based coal exporter, 8 percent more than the price Xstrata’s and Glencore’s stock traded at before the deal was first reported.

“The complicated issue is that Glencore already owns a significant portion of the partner company,” and it would only take a small percentage to block it, said Scott Moeller, a professor in the practice of finance at Cass Business School in London. “Talk about a super majority.”

Raise Ratio

The premium is below the 23 percent average for 2011 mining deals, according to data compiled by Bloomberg. Glencore may have to push the ratio to three to one, said BDO’s Searle.

Xstrata rose 1.1 percent to 448.25 pence in London trading at 8:34 a.m., retracing some of yesterday’s 4.9 percent slump, the biggest drop since Dec. 12. Glencore gained 1.3 percent to 449.2 pence, after yesterday’s 3.8 percent drop. The offer values Xstrata at about 39.1 billion pounds, the companies said.

The plan would create a business with $209 billion in sales, the companies said, combining the world’s largest publicly traded commodities supplier with Xstrata, the biggest exporter of coal burned in power stations.

Xstrata ‘Undervalued’

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

Richard Buxton, the head of U.K. equities at Schroders, also intends to vote the deal down, said Estelle Bibby, a spokeswoman for the company. Huy Hoang, a fund manager at HDH Capital Management Pte, said he would also oppose the plan.

Schroders has 1.5 percent of Xstrata and Standard Life about 2 percent, data compiled by Bloomberg show. Hoang, based in Singapore, said by phone that his company has about 5 million pounds in Xstrata.

“Standard Life and Schroders deciding to vote against the deal presents increased risk that the companies will have to change the terms.,” Tim Huff, a director of mining research at RBC Capital Markets in London, said by phone.

Shareholder Backing

Davis, 53, will become CEO of the group, while Glencore CEO Ivan Glasenberg, 55, will be deputy CEO and president, under the plan. The chairmanship and chief financial officer posts will also go to Xstrata’s John Bond and Trevor Reid, with Glencore CFO Steven Kalmin becoming Reid’s deputy. The board will include Davis, Glasenberg and a further 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.”

The Xstrata and Glencore boards are “committed to the deal,” Davis said. “We think it’s structured well, we think the governance is right, the terms are right.”

Ian Henderson, a fund manager at JPMorgan Asset Management who helps oversee about $8 billion, including Xstrata shares, said “we will think about it carefully” before deciding on whether to accept Glencore’s offer.

‘Marriage With Logic’

“I don’t think it’s an automatic tick in the box saying this is a marriage made in heaven,” Henderson said in an interview in Cape Town. “But that being said, it’s a marriage that has got a huge amount of logic.”

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 minority shareholders who control the remaining 65.9 percent. The Baar, Switzerland-based trader has secured 37.2 percent of its own shareholders’ votes for the deal, according to a statement.

“It’s round one and it’s going to be long and twisted battle,” Michael Rawlinson of Liberum Capital Ltd., said in an interview in Cape Town.

Nik Stanojevic, a London-based analyst at Brewin Dolphin Ltd., which manages about 24 billion pounds, including Glencore and Xstrata shares, said he expects the transaction to succeed on terms not far from the current offer.

“There are no other offers out there, so if Glencore walks away Xstrata’s share price will fall 15 to 20 percent,” Stanojevic said. “The ratio could rise to 3, but I’d be surprised if it reaches much higher than that. The premium Glencore pays should be lowered by the fact its stake already gives it significant control.”

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