Glencore’s Offer Undervalues Xstrata by 13%, Bernstein Says

Glencore International Plc’s $34 billion all-share takeover offer undervalues Xstrata Plc by 13 percent because the Swiss miner is set to benefit from increasing copper production, Sanford C. Bernstein Ltd. said.

“Our valuation puts a fair exchange at 3.16 times versus the 2.8 times on offer,” Paul Gait, a senior analyst at Bernstein in London, said in a note today.

Some Xstrata investors, including 12 percent holder Qatar Holding LLC, have said they would oppose the offer of 2.8 Glencore shares for each one in Xstrata. Glencore, the world’s largest publicly traded commodities supplier, is resisting pressure to raise its bid, according to a person with knowledge of the matter. Xstrata shareholders are due to vote on the offer Sept. 7.

“Not only do we consider Xstrata’s operational assets more attractive than Glencore’s, we believe there is insufficient transparency to rigorously assess risk in Glencore’s trading book,” Gait said.

Under Glencore’s so-called scheme of arrangement, agreed to by the target company’s board, as little as 16.48 percent of Zug, Switzerland-based Xstrata shareholders can block the deal because Glencore isn’t allowed to vote its 34 percent stake under U.K. takeover rules.

Opposition grew to about 15 percent after the Financial Times reported last month that Norway’s sovereign wealth fund, with a 3 percent holding, planned to join with Qatar to block the deal, Liberum Capital Ltd. said Aug. 29. The fund today declined to comment on whether it would oppose the deal.

Norges Bank

“We have a general policy of not commenting on individual investments, we have no plans to make an exception in this case,” Bunny Nooryani, spokeswoman at Norges Bank Investment Management, the investment arm of Norway’s central bank that manages the country’s Government Pension Fund Global, said in reply to e-mailed questions.

Xstrata gained 1.9 percent to 935.10 pence at the close in London, while Glencore, based in Baar, Switzerland, rose 1.1 percent to 389.50 pence. Xstrata shares are trading at a ratio of 2.4 times to Glencore’s, a discount of about 14 percent to the bid.

“Should the deal fall through, as the current share ratio of 2.4 times suggests may be the outcome, then we would consider a potential dip in Xstrata share prices an attractive buying opportunity,” Gait said.

Xstrata shareholders would benefit more from a merger with Anglo American Plc “as this would create, in our view, a credible challenger” to Vale SA, BHP Billiton Plc and Rio Tinto Group, the world’s largest mining companies, he said.

Anglo Snub

Xstrata in 2009 walked away from a 29.2 billion-pound offer for London-based Anglo American after its approach was snubbed by Anglo’s board.

“Glencore remains at heart a sales and trading house that has expanded into the mining space,” Gait said. “We consider the merger a good deal for Glencore as it improves the company’s operational asset portfolio and operational management.”

The chances of the deal winning approval from Xstrata shareholders has dropped to 20 percent because their demands for a sweetened bid are unlikely to be met, UBS AG said yesterday. An increased offer of 3.25 Glencore shares would be “more appropriate,” according to a June 26 statement from Qatar, the biggest Xstrata shareholder after the commodities trader.

“Should the merger be concluded successfully below 3.16 times, Glencore offers, in our view, a ‘cheap’ way of accessing the fundamental upside we see in Xstrata’s assets,” Gait said. “However, given the rich exchange ratio demanded by Xstrata’s largest shareholder, we question whether the merger can be completed at this point, implying some near-term downside risk for Glencore’s stock should the deal collapse.”

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