Xstrata Discount to Glencore Bid Shows Increasing Doubts on Deal

Glencore CEO Ivan Glasenberg
Ivan Glasenberg, chief executive officer of Glencore International Plc. Photographer: Andrey Rudakov/Bloomberg

Xstrata Plc is trading at a record discount to commodity trader Glencore International Plc’s 20.1 billion-pound ($31.8 billion) bid, suggesting investors increasingly believe this year’s biggest takeover will fail.

The discount to Glencore’s offer of 2.8 shares for each Xstrata share widened to 10.7 percent on Aug. 24, according to data compiled by Bloomberg.

Glencore Chief Executive Officer Ivan Glasenberg last week reiterated that he will rebuff calls for a higher bid. Sovereign wealth fund Qatar Holding LLC has increased its stake in Xstrata to 12 percent since the deal was announced Feb. 7 and is pressing for better terms. The takeover, on which investors are scheduled to vote on Sept. 7, would be the second-largest mining takeover if completed at current values.

“The prices of the stocks tell you that the deal is in trouble,” said Keith Moore, an event-driven strategist at MKM Partners LLC in Stamford, Connecticut.

Xstrata rose 0.1 percent to 927.7 pence in London on Aug. 24. Glencore climbed 0.2 percent to 366.85 pence. Trading in London is closed today for a public holiday.

Glencore, the largest publicly traded commodities supplier, is seeking to add Xstrata’s copper, coal and zinc mines to create the world’s fourth-biggest mining company and challenge rivals BHP Billiton Plc, Vale SA and Rio Tinto Plc. Glasenberg would be deputy CEO once the deal is done while Xstrata boss Mick Davis would be CEO.

Chinese Demand

That plan was thrown into doubt after Qatar Holding raised its Xstrata interest from 3 percent in February to a stake now worth at least 3.2 billion pounds. The fund said June 26 an exchange ratio of 3.25 Glencore shares would “provide a more appropriate distribution of benefits of the merger.”

The deal is poised against a background of moderating commodity demand as China’s economy slows. Glencore said Aug. 21 its first-half net income dropped 26 percent to $1.8 billion. Earlier this month, Xstrata reported a 33 percent decline in first-half earnings.

Glasenberg, 55, said last week he’s ready to walk away from the deal rather than overpay. Glencore may revisit the deal in a year or two if the current transaction doesn’t succeed, he said.

If Qatar votes against the bid, “they will block the deal,” Glasenberg said in an Aug. 21 interview.

“From my point of view, from Glencore’s point of view, so be it,” he said. “It’s not the end of the world.”

ISS Report

There is probably about a 40 percent chance that the bid succeeds, analysts at Liberum Capital Ltd. in London said in a note on Aug. 24.

“The widening of the bid spread reflects the market coming to terms with the increasing likelihood of a deal break,” Liberum said.

Charles Watenphul, a spokesman for Glencore, and Claire Divver, a spokeswoman for Xstrata, declined to comment.

The combination of Glencore and Xstrata can be blocked by just 16.48 percent of Xstrata holders under U.K. takeover rules because Glencore can’t vote its 34 percent stake.

Institutional Shareholder Services Inc., a proxy advisory service, said Aug. 22 that Xstrata shareholders should vote against the acquisition, which it described as being “marginal on economic merit.”

ISS also recommended Xstrata shareholders vote against proposed retention payments to keep Xstrata executives at the merged company. Xstrata investors Standard Life Plc and Fidelity Worldwide Investment in February criticized as excessive proposed payments of as much as 172.8 million pounds for 73 executives. Xstrata said in July the terms of incentive plan would be revised and be voted on at the Sept. 7 meeting

“My perception is the chances of this getting done here are probably low,” said Sachin Shah, a Jersey City, New Jersey-based special-situations and merger-arbitrage strategist at Tullett Prebon Plc. “It seems like Glencore’s CEO doesn’t really want to up the ante enough to get this to the finish line.”

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