Xstrata Climbs as Glencore Makes Final $35 Billion Takeover Bid

Xstrata CEO Mick Davis
Xstrata Plc Chief Executive Officer Mick Davis. Photographer: Mark Graham/Bloomberg

Xstrata Plc rose to a four-month high in London as investors bet a 9 percent increase in Glencore International Plc’s offer for the Swiss mining company boosts the odds this year’s biggest takeover will be completed.

Xstrata, the world’s largest exporter of coal for power stations, advanced 1.2 percent to close at 1,026.5 pence, the highest since May 11. The Zug-based target of Glencore’s $35 billion offer will “consider carefully the proposal received and consult with major shareholders before responding,” it said in a statement today.

“We expect this transaction to be completed under the revised proposed terms,” Jefferies Group Inc. analysts Christopher Lafemina and Seth Rosenfeld wrote in a report. It “should ultimately be satisfactory to the Xstrata board and most Xstrata shareholders.”

Glencore Chief Executive Officer Ivan Glasenberg today made his final offer as he seeks to shore up support for the all-stock deal after investors including Qatar’s sovereign wealth fund opposed his original bid. There’s now an 80 percent chance of the bid succeeding, Liberum Capital Ltd. said after Glencore raised its offer to create the fourth-largest mining company to 3.05 of its shares for each one in Xstrata, from 2.8.

Glencore, the world’s largest publicly-traded commodities supplier, declined 2.1 percent to 370 pence. Xstrata stock traded at 2.77 times that of Baar, Switzerland-based Glencore, up 3.4 percent from a ratio of 2.68 on Sept. 7.

Mick Davis

Along with the sweetened terms, Glencore said its revised takeover plan would see Xstrata CEO Mick Davis departing within six months. Davis, a 54-year-old South African, would run the combined group before handing over to Glasenberg, Glencore said in a statement today. That scraps an earlier plan for the Xstrata head to take the top job.

Glencore said its offer represents a “substantial premium” for a company with a 34 percent shareholder, referring to its stake in the company, which also produces copper, zinc, nickel and lead from mines in Australia, South Africa, South America and Canada.

Davis is ready to step down, provided shareholders get the right price, a person familiar with the situation said of Xstrata, which is based just two miles from Glencore’s headquarters. As many as 20 senior Xstrata executives may leave after the transaction is completed, the person said.

‘Significant Risk’

The proposal for Glencore’s Glasenberg to be CEO of the combined group “represents significant risk” for retention of Xstrata’s management team and goes against the merger of equals agreement made in February, Xstrata said Sept. 7. Today’s announcement confirmed the original plan for Xstrata’s John Bond to be chairman of the combined group.

Under the original deal, Xstrata proposed retention payments totaling 172.8 million pounds ($276 million) for Davis and 72 other executives. Those payments were criticized as excessive by investors including Standard Life Investments.

Glencore is “content” with Xstrata’s request for executives to “receive appropriate retention and incentive packages,” it said today. Glencore asked Xstrata’s board to consider if there are any changes it wishes to propose to the payments which included 28.8 million pounds in shares of the combined group to Davis over three years.

“The intention to replace Mick Davis as CEO and to amend the management incentive arrangements carries the risk of seeing key management depart,” Alain William, a Paris-based analyst at Societe Generale SA, said in a note today. “This is not a done deal and we have to recognize the possibility that Xstrata’s board might decide to walk away.”

Takeover Option

The proposal will continue to be structured as a so-called scheme of arrangement, requiring an approval threshold of 75 percent, with Glencore unable to vote its stake.

Glencore could switch to a takeover, needing support of more than 50 percent of shareholders, with the consent of the U.K. takeover panel and Xstrata, the commodities trader said.

The new proposal “is better than the old one,” said Jane Coffey, head of equities at Royal London Asset Management, which holds shares in each company. Glasenberg becoming CEO “is fine by me,” she said in an interview today.

Glencore unexpectedly called off a shareholder meeting on Sept. 7 arranged to vote on the all-stock offer. Xstrata released a statement the same day saying it had received a proposal from Glencore with a 17.6 percent premium that was “significantly lower than would be expected in a takeover.”

Less Aggressive

“The new proposal is structured far less aggressively than the straight takeover hinted at on Friday,” Liberum analysts wrote today. “We expect the revised structuring should get Xstrata board’s recommendation.”

In February, Glencore offered 2.8 of its shares, prompting investors including Qatar Holding LLC and Knight Vinke Asset Management LLC to say they would vote against the bid.

Qatar Holding, controlled by the Persian Gulf state’s royal family and owner of 12 percent of Xstrata, is Glencore’s biggest obstacle to completing the deal. The terms were changed after a negotiating session in a London hotel on the evening of Sept. 6 between Glasenberg and Qatar’s premier, mediated by former U.K. Prime Minister Tony Blair, according to a person with knowledge of the discussions.

Knight Vinke rejects Glencore’s latest proposal and urged Xstrata’s independent board members “to seek the highest possible price and invite third party offers,” it said in an e-mailed statement yesterday.

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