Axe Set To Fall On Xstrata/Glencore Merger Proposal

on Sep 12, 2012

This Friday, 7 September, is make-or-break day for the merger of mining company Xstrata and global commodities supplier Glencore. The already-deferred extraordinary general meeting of Xstrata shareholders will decide whether the deal signed off by the respective companies’ managements early in the year will get the nod or, as is looking increasingly likely, will be rejected. Two major Xstrata shareholders – corporates owned by the governments of Qatar and Norway respectively – have been vocal in their view that the merger significantly undervalues the mining giant.

Between them, Qatar Holdings and Norges Bank control some 15 percent of Xstrata voting stock. In the ordinary course, that wouldn’t be enough to block the merger proposal but with the 34 percent of Xstrata already held by Glencore being disqualified from the vote, the Qatar and Norway interests are close to the plus-25 percent needed to torpedo a deal that has been years in the making.

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!m[](/uploads/story/345/thumbs/pic1_inline.png)The sticking point is the rate at which Xstrata shareholders will receive Glencore stock – a number thrashed out by Xstrata’s independent directors and the Glencore management before the merger was formally announced back in February. The figure then was 2.8 Glencore ‘new shares’ for every Xstrata share and this has remained a peg in the ground for Glencore ever since, despite growing demands from Qatar Holdings and other Xstrata shareholders for the deal to be sweetened. According to recent media reports, Qatar Holdings wants 3.25 Glencore shares ‘or else’.

‘Nothing doing’ is very much the public stance of Glencore’s CEO, South African Ivan Glasenburg. He’s asserted his company’s view that 2.8 is a generous valuation placed on a mining company – Xstrata – which faces an uncertain future given its strategic stakes in gold and platinum, precious metals which have performed phenomenally in recent years but which are heavily exposed to sentiment shift and, in platinum’s case, to plunging demand in the continuing global economic crisis. And Xstrata’s situation is not helped by its sizeable exposure – a 24.9 percent equity holding – in Lonmin, whose platinum mine in South Africa has been brought to a standstill by the acrimonious – and lethal – miners’ strike now into its second month. As of writing, Lonmin shares were trading on the LSE at 586 pence, a little up on its 12-month low of 571 pence when the market closed on Friday. Perversely, the price of platinum has started to climb amidst fears of a future shortage.

According to a piece in the Times, if the merger with Glencore is indeed scuppered at the upcoming shareholder meeting, heads are set to roll in the upper echelons of Xstrata’s management. Notably, those of its board chairman Sir John Bond and senior director David Rough, the two independents most closely associated with negotiation and approval of the Glencore merger. Bond is set to take on the equivalent role at the merger entity, as is Xstrata CEO Mick Davis, with their Glencore counterparts assuming the respective deputy positions. The Times cites unidentified ‘most influential shareholders’ in Xstrata as gunning for the mining co’s top management, with Bond and Rough indicted for failure to secure a better deal and Davis – a 10-year veteran as CEO – slated for demanding a £29 million compensation package under the merger.

One institutional shareholder that hasn’t been shy about voicing its opposition to the Glencore tie-up is boutique asset manager Knight Vinke. Whilst holding only 0.6 of Xstrata voting stock, the London-based outfit is reportedly ‘in discussion’ with larger shareholders also opposed to the merger about a common voting position at the merger EGM and on future board and management positions. It’s that sort of common ground which could – and in all probability will – see opponents getting across the 25 percent threshold and scuttling the merger come Friday. Whether they have the numbers to later oust directors and managers – Glencore’s equity stake will get to vote on any such resolutions – is another thing.


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