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Glencore’s Profit to Fall as $30 Billion Xstrata Deal Vote Looms

Glencore’s Profit to Fall as $30 Billion Xstrata Deal Vote Looms
Glencore, the world’s largest publicly traded commodities supplier, owns mines, plants and warehouses, and ships raw materials including coal, oil, wheat and nickel. Source: Glencore International AG via Bloomberg

Glencore International Plc, the Swiss commodities trader seeking to buy Xstrata Plc for $30 billion, is set to report a slide in first-half profit today as investors prepare to vote on this year’s biggest takeover.

Net income excluding exceptional items will fall 36 percent to $1.6 billion, according to the average estimate of six analysts surveyed by Bloomberg. The company is due to release results at 7 a.m. London time.

Glencore joins Xstrata and Rio Tinto Group in posting lower earnings as mining companies face the dual headwinds of rising costs and lower prices. Its planned takeover of Xstrata, set for an investor vote on Sept. 7, has a 60 percent chance of being rejected, UBS AG said yesterday. Glencore Chief Executive Officer Ivan Glasenberg has rebuffed calls to raise the bid.

“Glencore so far has appeared adamant that current terms are generous and it has other growth options,” Myles Allsop, an analyst at UBS in London, wrote in a note. “Xstrata also appeared defensive at its first-half results, reiterating its standalone investment case.”

The companies have agreed on the exchange of 2.8 Glencore shares for each of Xstrata’s, an offer criticized by Qatar Holding LLC, Xstrata’s second-biggest investor, as too low.

Glencore gained 0.5 percent to close at 353.75 pence in London trading yesterday. Xstrata declined 3.4 percent to 907.5 pence, resulting in a ratio of 2.57 Glencore shares for each in Xstrata, and a discount of 8.4 percent to the offer. That’s the widest since it was announced on Feb. 7, signaling a heightened risk of the bid failing, data compiled by Bloomberg show.

Trading, Mining

Glencore, the world’s largest publicly traded commodities supplier, owns mines, plants and warehouses, and ships raw materials including coal, oil, wheat and nickel. The Baar, Switzerland-based company generates income from an industrial production unit, its trading operation and a 34 percent holding in Xstrata, the biggest exporter of power-station coal.

This month, Xstrata reported a 33 percent decline in first-half profit to $1.94 billion after metals and coal prices fell, while Rio Tinto said net income dropped 22 percent. The Thompson Reuters/Jefferies CRB Index of raw materials averaged 13 percent lower in the period than a year earlier as waning economic growth in China sapped demand.

The “golden years” of Chinese economic growth are gone, Roberto Castello Branco, director of investor relations at Vale SA, said Aug. 14. Vale is the world’s second-biggest mining company. Xstrata Chief Executive Officer Mick Davis said Aug. 7 the company’s first-half result reflected a “cyclical downturn” in commodity prices.

Qatar’s Holding

The risk of Glencore’s takeover failing has increased as Qatar’s sovereign wealth fund continues to raise its holding in Xstrata. The fund now owns almost 12 percent and spent about $5 billion building its stake from about 3 percent in February. Qatar pressed for improved bid terms on June 26, saying an offer of 3.25 shares would be “more appropriate.”

Other shareholders including Knight Vinke Asset Management LLC and Standard Life Plc have also called for a sweetened offer. The transaction, which would create the world’s fourth-biggest mining company, can be blocked by just 16.48 percent of Xstrata holders under U.K. takeover rules because Glencore can’t vote its stake.

“Xstrata shareholders need to keep Glencore merger-bump expectations in check,” Jeff Largey, an analyst at Macquarie Group Ltd., wrote in an Aug. 17 report. “Our analysis reveals a meaningfully accretive deal for Xstrata shareholders, even at 2.8 times, and therefore dampens the bull-case argument for a large merger sweetener.”

Revised Bid

Any increase in the offer probably wouldn’t exceed 2.9 to 3 Glencore shares, Largey said. Jefferies Group Inc. analysts Christopher Lafemina and Seth Rosenfeld said Aug. 1 that Glencore may announce a 3-share bid when it releases earnings.

Should the deal fail to complete, Xstrata can still generate “significant value,” CEO Davis said on an Aug. 7 call with analysts.

“The inherent capacity of Xstrata to generate value as a standalone company remains very, very powerful indeed,” even if the business model of the combined entity is “more powerful,” he said.

In backing Qatar’s push for a higher offer, New York-based investor Knight Vinke said Xstrata assets including the Antapaccay copper mine in Peru, the Koniambo nickel project in New Caledonia and the Collahuasi copper expansion in Chile are “not yet reflected in the valuation of the company.”

“They’ve just done quite a lot of investing in new production going forward,” Jane Coffey, head of equities at Royal London Asset Management, said in an Aug. 17 Bloomberg Television interview. “It was that production that’s coming on in two-to-three years’ time that is the foundation behind our belief that Glencore should pay more.”

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