June 28 (Bloomberg) -- Glencore International Plc and Xstrata Plc, seeking to salvage the year’s biggest takeover, moved to appease dissident investors who have threatened to derail the 16 billion-pound ($25 billion) deal.
Glencore yesterday met with Xstrata’s second-largest shareholder, Qatar Holding LLC, over the sovereign wealth fund’s call for a 16 percent increase in the commodity trader’s bid, people familiar with the London talks said. Xstrata revised payments for executives intended to keep them at the combined company by adding a link to performance and made all bonuses payable in shares after some holders attacked them as excessive.
Qatar, which spent more than $4 billion amassing an 11 percent Xstrata stake, surprised investors and analysts two days ago with its criticism of the price. It asked Glencore to raise its February offer of 2.8 of its shares for each of Xstrata’s to 3.25. Disquiet among some shareholders over the merger terms intensified after Xstrata revealed May 31 it planned to pay top executives 172.8 million pounds in bonuses for their loyalty.
“We believe this deal is important for Glencore,” UBS AG analysts Myles Allsop, Ben Davis and Danielle Chigumira said in a note today. “But we do not expect an increase to 3.25 times in the current macro and commodity environment. A bump to 3 times is possible.”
The ratio between the two companies’ stocks has traded at 2.58 this week, the lowest relative to Xstrata shares since the bid was announced. It yesterday narrowed to 2.67, reflecting a lower risk of the deal collapsing. Given Glencore’s dominant shareholding of 34 percent of Xstrata, the likelihood of a rival bid is remote. Today’s reading was 2.7.
“Since Qatar put a lot of money to work in Xstrata, they’ll have downside risk if they allow the deal to fail,” James Bevan, chief investment officer at CCLA Investment Management Ltd., said in an interview on Bloomberg Television. “Glencore has already got a very significant position in Xstrata so it doesn’t want the deal to fail. There will be some maneuvering, there will be some compromise.”
Both companies yesterday said they would set new dates for shareholder votes on the transaction originally scheduled for July 11 and 12. Xstrata said it expects the deal to be complete in early October. The companies had originally targeted the third quarter.
Standard Life Plc and Schroders Plc are among Xstrata investors to have called for the February offer to be improved. Glencore, led by Chief Executive Officer Ivan Glasenberg, may need to increase its offer, analysts including Fat Prophets’ Rupert Nathan, have said.
“If they want the asset, yes, they’re simply going to have to pay up,” Nathan said. “It’s going to be a binary outcome, they either pay up or walk away. I think on balance they’ll end up paying up.”
Liberum Capital Ltd. expects Glencore to offer a “token increase,” while Jefferies Group Inc. analysts said the commodities trader may need to offer 3 of its shares to win Qatar’s support. Bank of America Corp. said a higher offer is a “real possibility.” Still, the deal may fail given Qatar’s rejection, UBS AG said yesterday.
Xstrata declined 0.4 percent to 793.5 pence at the close in London. Glencore, the largest publicly traded commodities supplier, fell 1.6 percent to 293.55 pence. Charles Watenphul, a spokesman for Glencore, declined to comment on the discussions with Qatar Holding.
Glencore is seeking to add the Swiss company’s copper, coal and zinc operations to its trading business. The takeover is the largest announced deal so far this year, according to data compiled by Bloomberg.
Qatar’s opposition takes those dissatisfied with the terms to about 14 percent of Xstrata shareholders. That’s close to the 16.48 percent threshold that would block the so-called merger of equals because U.K. takeover rules prevent Baar, Switzerland-based Glencore from voting its own shares in Xstrata.
The Qatari sovereign wealth fund has bought 311 million shares in Zug, Switzerland-based Xstrata, with derivatives and options taking its total stake to 10.98 percent, a June 14 filing shows.
Xstrata is working with Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Nomura Bank International Plc as financial advisers, while Glencore has tapped Citigroup Inc. and Morgan Stanley. The trader is paying as much as $80 million in fees, and Xstrata as much as $116 million, a document on the merger published by the two shows.
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