March 25, 2023

DealBook: Glencore’s Bid to Buy Xstrata Is Increased at the 11th Hour

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.”

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DealBook: Bank of America Swings to a Profit, Mostly From One-Time Items

Bank of AmericaVictor J. Blue/Bloomberg NewsBank of America‘s fourth-quarter gain was overshadowed by continuing weakness on Wall Street.

8:15 p.m. | Updated

For Bank of America, less is more.

Even as the company reported a $2 billion profit in the fourth quarter on Thursday, what was once the country’s largest bank continued to shrink, wiping tens of billions of dollars from its balance sheet and laying off nearly 7,000 employees.

The results are the clearest evidence so far of the chief executive Brian T. Moynihan’s view that bigger isn’t better, and Wall Street seemed to agree — Bank of America shares rose more than 2 percent to just under $7 a share, the highest level since October. The boost was a rare break for long-suffering Bank of America investors, who watched its shares dive by more than 50 percent last year.

While the profit was a turnaround from the fourth quarter of 2010, when Bank of America lost $1.2 billion, it was largely a result of one-time gains. They included $2.9 billion from the sale of a stake in China Construction Bank and $1.2 billion on the exchange of preferred stock for common stock.

The moves helped the company solidify its underlying capital position in the face of huge losses on soured mortgages. The bank has been submerged in red ink stemming from its 2008 acquisition of the subprime specialist Countrywide Financial. That purchase has saddled the bank with over $30 billion in losses.

“We enter 2012 stronger and more efficient after two years of simplifying and streamlining our company,” Mr. Moynihan said in a statement.

The bank has been under pressure from investors and regulators to strengthen its capital position under international rules and catch up to competitors with higher ratios. The company now expects the Tier 1 capital ratio under new Basel regulations to finish the year at between 7.25 and 7.5 percent, up from a previous target of 6.75 to 7 percent. Regulators argue that a bigger buffer of capital makes banks less reliant on borrowed money and enhances the stability of the financial system.

“The earnings were definitely weaker than we expected but their comments on capital were better,” said Moshe Orenbuch, an analyst with Credit Suisse.

Mr. Orenbuch and other analysts noted that the worry now was how the bank was going to cut expenses and expand profits from the core businesses that remain. The banking industry is being buffeted by new rules that cut into once-lucrative fees charged to consumers as well as new restrictions on how much risk banks can employ on Wall Street.

“There is uncertainty about the long-term earnings power of the company, but they’re pursuing the right strategy,” said Chris Kotowski, an analyst with Oppenheimer.

“Everybody wants to see more capital and you don’t want to stick out from the pack,” he added. “They’ve closed a lot of the gap.” Echoing a trend at Citigroup and JPMorgan, which both recently reported fourth-quarter results, Bank of America’s traditional lending businesses were healthier than capital markets activities like stock and bond trading. Revenue dropped by 31 percent in the company’s global banking and markets unit, which includes Bank of America Merrill Lynch, as the unit recorded a net loss of $433 million.

International lending helped propel faster growth in loans from the global banking and markets division, rising 9 percent to $131 billion. “Loan demand globally is stronger than it is in the U.S.,” said Bank of America’s chief financial officer, Bruce R. Thompson. “And with the pullback of European institutions, we’re going to see more opportunities for loan growth.”

For the quarter, Bank of America earned 15 cents, matching analyst estimates. For the full year, it earned just a penny a share, or $1.4 billion, having taken huge charges against earnings because of the mortgage mess. That was better than the full-year result for 2010, when the bank lost $2.2 billion, or 37 cents a share.

Thursday’s report offered clues to how broad the company’s retrenchment has been. Besides the job cuts, which took Bank of America’s head count to 281,791 at the end of the fourth quarter, the bank closed more branches than it opened in 2011. More jobs are expected to disappear as the company’s restructuring eventually reduces its work force by roughly 30,000.

In what was seen as a sign of consumer displeasure with the $5 debit card fee that the bank decided to impose last summer before dropping it in the fall, total deposits shrank in the fourth quarter by just over $5 billion, to $417.1 billion. “We had some impact from the $5 debit card fee. That’s why we decided to reverse it,” Mr. Moynihan said in a conference call with analysts.

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DealBook: Goldman Sachs Reports $428 Million Loss

People arrived at Goldman Sachs headquarters in Manhattan on Tuesday. The investment bank reported its second quarterly loss since going public in 1999.Mark Lennihan/Associated PressPeople arrived at Goldman Sachs headquarters in Manhattan on Tuesday. The investment bank reported its second quarterly loss since going public in 1999.

Goldman Sachs, weighed down by problems in its private equity portfolio and the broader global economic woes, reported a loss of $428 million, compared with a $1.7 billion profit a year ago.

It’s only the second quarterly loss for Goldman since the investment bank went public in 1999.

The company reported a loss of 84 cents a share, worse than analysts’ predictions of a loss of 16 cents, according to Thomson Reuters.

The troubles, which follow similar weakness in the second quarter, underscore the difficult environment for investment banks. Goldman, widely considered the savviest trading firm on Wall Street, had a significant revenue drop in crucial divisions like fixed income and investment banking amid the market turmoil.

The firm got whacked by negative net revenue of $2.48 billion in the investing and lending group. The results included a $1.05 billion hit on its private equity investment in the Industrial and Commercial Bank of China, a strategic investment made in 2006; I.C.B.C. stock fell roughly 35 percent in the quarter. The firm also booked net losses of roughly $1 billion related to equities, on top of net losses $907 million in debt positions.

“Our results were significantly impacted by the environment, and we were disappointed to record a loss in the quarter,” Lloyd C. Blankfein, Goldman’s chief executive, said in a statement. “However, we believe the strength of both our client franchise and our balance sheet positions us well for when economies and markets improve.”

Net revenue in the business that trades bonds, currencies and commodities was $1.73 billion, down 36 percent from year-ago levels. This division accounted for roughly 48 percent of all revenue generated by the firm in the third quarter. Net revenue from equities trading and commissions was up 18 percent, to $2.3 billion. The firm attributed this rise to higher commissions that resulted from increased activity in the quarter.

Goldman’s return on equity, a crucial measure of profitability, fell to 3.7 percent annualized for the nine months, down from 10.3 percent in the year ago period. Five years ago, it was 32.8 percent.

The quarterly loss is likely to translate into smaller bonuses for Goldman’s roughly 30,000 employees. So far this year, the firm set aside $10.01 billion to pay compensation and benefits, down 24 percent for the same period in 2010. Firms accrue compensation all year and pay it out in the fourth quarter.

While Goldman has set less money aside to pay employees, the ratio of compensation and benefits to net revenue in the third quarter was 44 percent, in line with previous accruals. Goldman, like most Wall Street firms, has been cutting staff in recent months. At the end of the third quarter, it had 34,200 employees, down 1,300, or nearly 4 percent, from just three months ago.

In the wake of the downturn, Goldman has been working to reduce expenses. The firm’s third-quarter operating expenses including compensation were $4.32 billion, 29 percent lower than the third quarter of 2010.

Goldman isn’t the only bank feeling the pinch. Last week JPMorgan Chase reported that its third-quarter profit dipped 4 percent, to $4.26 billion from the year ago period. Citigroup had an impressive rise in profit, but much of it attributed to a one-time accounting gain.

The situation has weighed on the stocks of all the financial firms. Goldman’s stock is down 42.5 percent this year. Morgan Stanley, which is scheduled to report its earnings Wednesday, is down almost 44 percent year to date.

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DealBook: Blogging Morgan Stanley’s Annual Meeting

Morgan Stanley

There was no shortage of good topics on which shareholders can grill Morgan Stanley’s chief executive, James P. Gorman, at the firm’s annual meeting on Wednesday in Purchase, N.Y.

Mr. Gorman’s campaign to rebuild Morgan Stanley has been slow-going.

He has made some progress repairing crucial business lines. In April, he renegotiated a deal governing an expensive lifeline the firm took to bolster its balance sheet during the financial crisis.

But the firm’s stock, currently trading at about $24 a share, continues to struggle. It is 10 percent lower than when shareholders gathered for last year’s annual meeting.

DealBook was on hand for the meeting, which was held this morning. What follows is a blog of the event.

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