Glencore International Plc met with Qatar’s sovereign wealth fund in London today to try to revive a 16 billion-pound ($25 billion) takeover of Xstrata Plc, three people with knowledge of the situation said.
Qatar Holding LLC late yesterday surprised global markets by objecting to the proposed deal, which would create the fourth-biggest mining company, because the price was too low. The fund has spent more than $4 billion amassing an 11 percent Xstrata stake this year. Its stance adds to investor opposition to the transaction and raises concern the deal will fail.
“This is a seismic development that has almost certainly caught Glencore off guard,” Liberum Capital Ltd. analysts wrote in a note today, referring to Qatar’s stand. “We firmly expect Glencore’s response will be that the economics don’t support a merger at 3.25 and that it is opposed to sweetening its offer.”
Qatar wants the offer of 2.8 Glencore shares for each of Xstrata’s raised to 3.25, it said in a statement yesterday.
Xstrata today announced changes to payments for executives intended to keep them at the merged company after investors also criticized the bonuses. They will be linked to performance under revised proposals agreed with Glencore, it said in a statement.
Xstrata also said it expects the merger to be completed in early October, subject to approvals from necessary parties. Glencore said it delayed its shareholder vote, earlier planned for July 11, on the merger, partly because of Xstrata’s changes.
Qatar, advised by Lazard Ltd., joins investors including Standard Life Plc and Schroders Plc in calling for the February offer to be improved. Glencore, led by Chief Executive Officer Ivan Glasenberg, may need to boost its bid, some analysts said.
“This could be a bit too close to call and we think that Glencore will have to consider Qatar’s comments carefully,” Jason Fairclough and Daniel Lian, analysts at Bank of America Corp., said today in a note to clients. “We now see an increase in the terms of the deal as a real possibility.”
Xstrata rose 1.4 percent to close at 796.6 pence in London. Glencore, the largest publicly traded commodities supplier, slid 1.5 percent to 298.3 pence. Glencore spokesman Charles Watenphul declined to comment on its discussions with Qatar Holding.
The 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.
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. UBS AG said the deal may fail given Qatar’s rejection of the plans.
“There is now a material risk that the merger could fail, with both management teams adamant that the current terms are fair and had only been agreed after extensive negotiations,” UBS’s Myles Allsop, Ben Davis and Danielle Chigumira said today.
Liberum expects Glencore to offer a “token increase” in its bid, while Jefferies Group Inc. analysts said Glencore may need to offer 3 of its shares, from 2.8, to win Qatar’s support.
Glencore, owner of about 34 percent of Xstrata, is seeking to add the Swiss company’s copper, coal and zinc operations to its trading business. The takeover is the largest announced M&A deal so far this year, according to data compiled by Bloomberg.
Shareholders also criticized the terms of 172.8 million pounds of retention awards earlier proposed for Chief Executive Officer Mick Davis and 72 other executives. The payments were called excessive by investors including Standard Life and Fidelity Worldwide Investment and last week attracted a so-called red-top rating, the most serious corporate governance warning from the Association of British Insurers, whose members represent about 17 percent of the U.K. stock market.
“These are likely not insurmountable hurdles to the proposed Glencore-Xstrata merger,” Jefferies analysts Christopher LaFemina and Seth Rosenfeld said in a report yesterday. “A bump from Glencore and a revision to the management retention awards should be the logical next steps. We continue to expect this proposed merger to happen.”
Xstrata today said payments to the most senior executives will be tied to meeting cost savings targets and all will be made in stock instead of cash as it moved to allay concerns.
The mining company 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.
“The key question the market will now focus on is whether Ivan Glasenberg will accede to sweetened offer demands, or whether he will walk away,” the Liberum analysts said. “We continue to believe the risk of a deal break remains low.”