Glencore, Xstrata in for long haul
Merger ‘poker game’ begins
LONDON • Commodities trading giant Glencore
International PLC and Xstrata PLC are digging in for days or even weeks of brinksmanship to try and save Glencore’s US$26-billion takeover deal after Qatar’s state investment fund interrupted proceedings this week with a last-minute call for better terms.
Bankers involved in the transaction have already flown out to the oil-rich Gulf state as the companies roll up their sleeves for what one person familiar with the matter described as a “poker game.”
The talks will pit Glencore’s strong-willed chief executive Ivan Glasenberg against Qatar Holding
LLC’s “iron man” Ahmad al-Sayed, who has built up a stake of nearly 11% in Xstrata since the Glencore deal was announced in February.
Qatar, which started investing in Xstrata in January 2011, is now the second-biggest shareholder in the miner after Glencore with nearly 34%.
“There is more brinksmanship to come. Things will go quiet for the next few weeks while they see if they can work out a compromise. Ivan may budge a little bit, but he won’t roll over,” said another person familiar with the matter.
An initial meeting in London this week ended with both sides entrenched in their original positions, the person added.
Glencore indicated it would not budge from its original offer of 2.8 new shares for each existing Xstrata share and Qatar Holding, the investment arm of the Qatar Investment Authority, said it would not accept less than the 3.25 new shares it had demanded in a rare public statement.
Pressure to reach a deal with shareholders this week eased after changes to retention payments for Xstrata executives forced Glencore and Xstrata to delay votes on the deal, but sources familiar with the matter say all sides are still keen to resolve the matter swiftly. Finding common ground, though, could take time. “The focus is on getting the deal done but there are some strong personalities involved,” another source familiar with the matter said.
“Ivan is going to do what it takes to get a good deal and of course Qatar are in it for the long term [so could hold firm.] ... It is a case of who blinks first.”
The majority of market observers think the deal will ultimately proceed, however, with the consensus expecting both sides to yield a little and agree on an improved ratio of about three new shares for each current Xstrata share.
Sources differ on whether they believe Glencore would be pushed to a ratio of three or more, potentially preferring a face-saving number just below.
Glencore’s share price closed trading on Friday up 0.7% at 295.55 pence ($4.71), while Xstrata’s was up 0.6% at 798.6p.
“We expect the merger to go ahead as the financial downside for all parties is too great,” said Dominic O’Kane, an analyst at Liberum in London.
Mr. O’Kane believes that Glencore could benefit by delaying a shareholder vote on an improved offer until after Xstrata’s first-half results on Aug. 7.
He expects that the miner’s first-half earnings will show a decline of about 50% year-over-year, reducing pressure on Glencore to increase its offer.
Other analysts question this, arguing Glencore itself will be hit by the same price drop.
Analysts at Canaccord Genuity said they thought a ratio of three could “see the deal home,” although it said it was also feasible that Glencore could dig in at 2.8.
One British hedge-fund manager agreed, citing Glencore’s decision as the largest shareholder in Xstrata to reject Brazilian miner Vale SA’s cash and share offer for Xstrata in 2008 as evidence that Glencore’s reputation as a consummate dealmaker was not always inviolate.
“Glencore has done irrational things in the past,”the hedgefund manager said.