Glencore’s Bid For Xstrata Faces Tough Opposition

By:
on Aug 21, 2012
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When Glencore (GLEN) and Xstrata (XTA.L) began discussing the terms for a merger back in February, few were those who thought that the biggest mining deal ever would go smoothly through without a hiccup. History has shown that huge deals like this are typically difficult to come out of the end of. The case in question is not proving to be the exception to that rule. Problems started soon after the two companies had announced their plans, as Glencore’s initial offer of 2.8 Glencore shares per Xstrata share was declared unattractive by some of the shareholders, namely Standard Life and Legal & General. But the real problems began when the Middle Eastern state investment fund Qatar Holdings came arrived on the scene.

In April, 2012, Qatar Holdings bought 5 percent of Xstrata for £1.7 billion, becoming the third largest shareholder in the company (behind Glencore and Black Rock). Since then the fund has managed to build its stake up to 11.7 percent, a stake which could well be enough to scupper the deal.
!m[](/uploads/story/280/thumbs/pic1_inline.png)Qatar Holdings has made clear that it wants an improvement on Glencore’s offer- an increase to 3.5 Glencore shares per Xstrata. And now the fund has the means to see its demands through. For the merger to happen it needs the support of 75 percent of the shareholders, not including Glencore, which owns 34 percent. This means that 16.5 percent of Xstrata investors would be enough to block the deal. With Standard life and Legal & General having already expressed their discontent with the terms of the offer, Qatar Holdings is in a good position. Not to mention that the Middle Eastern investment fund is looking to up its stake even more (though reaching the 16.5 percent threshold is not likely to be part of its plans).

Glencore is aware that its opponents are in a strong position, but the company is determined to stick by its initial offer, especially with the decline in commodity prices. Glencore will be posting financial results tomorrow.
The company’s profits are expected to drop by 30 percent to $1.6bn for the first half of 2012 with the main influences for this lower commodity prices, higher costs and some power problems in Congo.

Earlier this month Xstrata also released its results and registered a significant decrease in pre-tax profits. The company dropped to $1.53 billion from $4.1 billion in the first half of this year. The slump was attributed to the slowdown in China.
Given that it’s the largest shareholder in Xstrata with 34 percent of its shares, Glencore, as it has been stated by the company’s Chief Executive Officer Ivan Glasenberg, is prepared to play the long game. The patchy financial results play to Glencore’s hand in sticking to its initial bid. And it also has the support of the second largest shareholder in Xstrata – Black Rock. But with no indications of the opposition willing to give in, the future of the deal is unclear. At the moment all hangs in the balance.

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