LONDON — Glencore, the world’s largest commodities trader, saved its megamerger with Xstrata from collapse on Friday by sweetening its offer for the large multinational mining company. But the deal still remains in limbo after Xstrata raised concerns about the revised proposal.
Under the new terms, Glencore is offering 3.05 of its shares for every Xstrata share, valuing the combined company at $90 billion. The commodities trader had initially agreed to exchange 2.8 shares.
Glencore is trying to win over investors as it aims to gain size and scale in an industry increasingly under financial pressure.
Prices of natural resources have plummeted over worries that demand from important customers in the emerging markets might be faltering. The situation has weighed on the profits and share prices of major players like Glencore and Xstrata. Earnings at Xstrata dropped by 33 percent in the first half of the year.
By teaming up, the two companies would significantly increase the size of their balance sheet, giving them additional firepower to make deals and invest in new projects. They could also use the merger to cut costs and better weather the market volatility.
But Qatar Holding, the sovereign wealth fund of the Persian Gulf nation and Xstrata’s second-largest shareholder, had threatened to derail Glencore’s effort. For months, the emirate said it would vote against the deal unless Glencore improved the terms. Investors were set to vote on the deal Friday morning.
While Glencore appears to be moving toward compromise, it is not clear whether the proposed terms will appease Xstrata shareholders. Qatar has not publicly weighed in on the deal, and the board of Xstrata has indicated the new price might still be too low. On Friday, the mining company said Glencore’s proposal “lacks sufficient information on key elements.”
The stage is now set for a round of fractious negotiations that could last for weeks. While increasing the price, Glencore also added conditions to the deal, which may not sit well with Xstrata shareholders.
Under the proposal, Ivan Glasenberg, Glencore’s chief executive, would lead the merged company. Previously, Mick Davis, the head of Xstrata, was set to take over as chief executive. Qatar has been supportive of Mr. Davis and his management team.
Glencore also wants the option to restructure the deal as a takeover, rather than a merger. By doing so, the company would need only 50 percent of Xstrata investors to agree. Glencore, which already owns 34 percent of Xstrata, would also be able to vote its shares in a takeover. Such a move would greatly dilute Qatar’s sway.
“This is now a lot cleaner deal,” said Michael Rawlinson, head of natural resources at Liberum Capital in London. “It’s more of a takeover with Ivan as C.E.O.”
While Qatar gave no public indication of its support or opposition, Xstrata warned shareholders about the potential problems with the deal. The company highlighted the “significant risk” if Mr. Davis and his lieutenants did not lead Glencore-Xstrata.
Xstrata also said the new ratio offered a premium that was “significantly lower than would be expected in a takeover.” Xstrata said the bid represented a 22.2 percent premium to its closing price on Thursday. In 35 proposed mining deals over the eight years to 2011, the average premium paid was 31 percent, according an HSBC report published in February.
“It’s interesting that they recommended a deal at 2.8 and now say that 3.05 is not high enough,” said Andrew Keen, mining analyst at HSBC. “Xstrata looks like they’re mounting a defense.”
Xstrata’s stance gained support. On Friday, Knight Vinke, the American activist investor, said it “welcomed the Xstrata board’s belated willingness to represent the interests of minority investors.” Knight Vinke sided with Qatar in July, after the emirate demanded Glencore improve the merger ratio to 3.25 to 1.
Richard Buxton, a fund manager at Schroders, told reporters, “We were prepared to accept 3.25, and we hope the Qataris stick to that number.” Schroders owns nearly 1 percent of Xstrata.
Other shareholders welcomed Glencore’s offer. “We are supportive of the improved terms and the changes to the executive governance arrangements,” said David Cumming, head of equities at Standard Life Investments, a fund manager that owns 1.4 percent of Xstrata and 0.8 percent of Glencore. Previously, Mr. Cumming had criticized the deal, calling the earlier offer inadequate.
Xstrata and Glencore representatives did not say when a new shareholder vote would take place. Glencore must first present a firm offer.
The revised deal represents an about-face for a chief executive who has gained a reputation as one of the toughest negotiators in the commodities business. For months, Glencore seemed unwilling to budge on its initial bid. Last month, Mr. Glasenberg said that it would be “no big deal” if the merger failed and suggested privately that Glencore could make a new offer for Xstrata next year.
The new proposal came together at the last minute. After fast-and-furious discussions, Mr. Glasenberg approached Qatar with the deal late Thursday, according to a banker to one of the two companies, who spoke on the condition of anonymity.
As Glencore shareholders gathered Friday morning in Zug, Switzerland, to vote, Simon Murray, the company’s chairman, adjourned the meeting, citing developments that had “happened very recently overnight.” After the proposal was unveiled publicly, Xstrata adjourned its own shareholder meeting. A few hours later, Xstrata released its critique of the outlined terms.
Glencore’s package of new proposals is “all about face-saving,” the banker said. A higher offer “was always there as a possibility.”
Article source: http://dealbook.nytimes.com/2012/09/07/glencore-postpones-meeting-in-bid-to-secure-deal/?partner=rss&emc=rss
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