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WSJ: Massive Glencore-Xstrata Mining Deal On Rocks
Sunday, Sep 09, 2012
(This item was originally published on Saturday)
(From THE WALL STREET JOURNAL)
By Dana Cimilluca and Alex MacDonald
LONDON -- The biggest corporate deal of the year, part of a global scramble to control commodities, turned into a power play after a sweetened offer to salvage the merger.
Former British Prime Minister Tony Blair was enlisted by Glencore to help soften the opposition of the Qatari sovereign-wealth fund, with the Prime Minister of Qatar, Hamad bin Jassem bin Jabor Al Thani, also involved personally, according to people familiar with the matter.
It is still far from a done deal, however, and there is a possibility now that it could turn hostile after Glencore proposed that its chief executive become the head of the new company.
The developments unfolded on Friday morning in Zug, Switzerland, where a meeting of Xstrata shareholders was expected to result in rejection of the deal, in large part because of Qatar Holding 's opposition to the price. But the meeting was abruptly adjourned as Xstrata announced that its board had received a new offer of 3.05 Glencore shares for each Xstrata share, an increase from the prior ratio of 2.8.
However, the new proposal doesn't merely raise the price -- it scrambled the already complex social dynamics of the deal. Glencore's revised offer calls for its chief executive, Ivan Glasenberg, to become CEO of the combined company. He was to have been deputy CEO under the prior structure, and Xstrata chief Mick Davis would have been CEO. The two men have a long and sometimes contentious history that goes back to their college days in South Africa.
The deal would combine Glencore, the world's largest commodities trader, with Xstrata, a big owner of coal and other mining assets, to create a unique company that would both extract and distribute some of the key inputs in the international economic machinery. The combined company would have a market capitalization of more than $70 billion.
Xstrata initially cautioned in a statement that the new offer isn't firm and that elements of it could change.
In a subsequent statement, it made clear that its approval of the new terms is far from guaranteed. It pointedly said the new proposal would create "significant risk around the retention of the Xstrata senior and operational management intended to be responsible for approximately 80% of the combined group's earnings."
Crucially, Xstrata also questioned whether the deal, which had earlier been technically structured as a merger, is now in fact a takeover given that Glencore management would be in largely charge of the combined company.
The difference is more than semantic. The new bid, which represents a premium of as little as 17.6% over Xstrata's share price before word of the deal surfaced in February, "is significantly lower than would be expected in a takeover," Xstrata said.
According to people familiar with the matter, Xstrata officials only saw the new terms in a one-page proposal, about 100 words long, that they received a half-hour before the shareholder meeting was to have started. It also contained an item that would roll back incentives that were meant to hold on to key Xstrata officials, in a further sign that Switzerland-based Glencore, the world's largest commodities trader, is moving away from the concept of a merger of equals.
In recent days, Mr. Glasenberg had offered Mr. Davis a modified role in the new governance structure, but Mr. Davis declined, according to people familiar with the matter.
It isn't the first time tension has flared between the two Anglo-Swiss companies and their respective CEOs. Though they have known each other for decades and Glencore was instrumental in the development of Xstrata into the mining powerhouse that it is today, the men have often found themselves at odds when the interests of the two companies diverge.
Glencore already owns 34% of Xstrata. Mr. Glasenberg has long coveted a full takeover of Xstrata but had never been able to agree on terms with Mr. Davis. Indeed, part of the logic of the merger is to do away with such conflicts and enable the two companies and their complementary assets to work more in harmony. Glencore's 2011 initial public offering was premised partly on eventually clinching a deal with Xstrata.
Another question mark surrounds Qatar Holding 's view of the new terms; it was the cash-rich Middle-Eastern fund which first threw the deal into serious doubt when it announced its opposition earlier this summer. According to a person familiar with the matter, Qatar Holding has yet to sign off on the new offer and is waiting for a firm proposal and to hear from Xstrata's board. Qatar Holding , which owns 12% of Xstrata, in the past has expressed support for Mr. Davis. It isn't clear whether his absence would cause the fund to hold back its support or ask for a higher price.
Other shareholders' support is also far from guaranteed, though in one early encouraging sign for Glencore, the new terms received a boost when Standard Life Investments said Friday that it was supportive of them. Standard Life, which had opposed the deal, owns a 1.42% stake in Xstrata and 0.81% of Glencore.
Still, Glencore has its work cut out convincing other shareholders of the merits of its new proposal. A shareholder who is among the biggest 30 in the company said, "There are still too many unanswered questions" about the revised offer, including whether the new proposal is a merger or a takeover. He said that if it is a takeover, he would have to consider carefully the premium being offered.
Glencore shares fell by 3.6% to 378.05 pence ($6.02) Friday in London, while Xstrata rose 3.6% to 1,014 pence. That puts the closely watched ratio at 2.68 currently, well below the new offer, and suggests investors still aren't convinced the deal will happen. At those stock prices, a Glencore acquisition of the Xstrata shares it doesn't already own would be valued at about $36 billion under the new ratio.
The announcement comes after Glencore and Qatar Holding entered talks overnight to rescue the historic merger, which would be the year's largest.
Both companies' shareholders were scheduled to vote on the deal Friday morning, though Glencore's vote was considered more of a formality. Both votes were postponed.
The merger plan has inched closer to collapse ever since Qatar Holding surprised the market in June by calling on Glencore to raise its share-swap ratio to 3.25 Glencore shares for every Xstrata share. Until Friday, Mr. Glasenberg had held firm to the existing offer, arguing that it is more than fair.
The impasse intensified last week when the Qatari fund said that it would vote against the 2.8-share offer.
Glencore and Xstrata are still in the process of securing regulatory approval for the merger, which they previously expected to close in the fourth quarter.
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Cassell Bryan-Low contributed to this article.
(END) Dow Jones Newswires
09-09-12 0410GMT
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