COMMODITIES trading group Glencore is expected today to formally unveil a proposed merger with Swiss miner Xstrata alongside the mining group’s annual results.
Top executives at the two companies were last night hammering out the final details of a merger valued at up to $88 billion, including the premium on offer by the commodities trading giant to secure approval from the miner’s shareholders.
Glencore is set to pay a larger premium than expected to seal its long-coveted merger with Xstrata, a move designed to defuse concerns among Xstrata investors about a cosy deal between the chief executives of the companies.
Sources involved in the talks have told Reuters the sweetener is likely to be “high single digit to low double digit”. One source familiar with the companies said a ratio of 2.7 to 2.8 Glencore shares per Xstrata share was currently on the table, implying a premium of roughly 8 per cent based on last Wednesday’s closing price.
That ratio puts a greater relative value on Xstrata shares than most analysts or investors had anticipated.
“I think a 2.8 ratio is relatively modest, but reasonable,” said Nik Stanojevic, analyst at Brewin Dolphin. “Xstrata is not a takeout target for anyone else on account of Glencore’s stake.”
Xstrata, the world’s fourth largest diversified miner, announced last week that it was in discussions with Glencore, already its single largest shareholder, a move expected ever since Glencore’s $10 billion listing last May.
The premium on offer from Glencore has been a point of disagreement in the past, and Xstrata shareholders have consistently said they will need to see a sweetener that recognises the company’s growth potential.
Three-quarters of Xstrata’s shareholders would have to approve the deal – with Glencore’s 34 per cent holding unable to vote – meaning that only 16.4 per cent of Xstrata’s shareholders can block it.
Mark Kelly, of London-based financial services firm Olivetree Securities, said Glencore could still tweak the premium a little beyond 2.8 if it needed to. “I would expect that sufficient diligence has been done with shareholders to ensure that whatever comes out gets done.”
Xstrata and Glencore, which would combine one of the world’s largest traders with mining assets from New Caledonia to the Democratic Republic of Congo, are expected to use their combined clout to look at other deals, backed by an improved debt profile.
Sources earlier told Reuters the two groups, which restarted discussions before Christmas, have reached an understanding on the structure of the combined group's management. Xstrata is expected to take a majority of seats on the board. – Reuters/Financial Times Limited 2012
