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Last week, Qatar’s sovereign wealth fund said it wants a higher offer for Xstrata in its planned merger with Glencore. Qatar Holding’s announcement has created a major hurdle in this mega merger, with analysts saying it is likely that Glencore will not up the stakes by as much as Qatar wants.
Glencore International‘s (LSE:GLEN) $30 billion offer for Xstrata (LSE:XTA) could collapse. Qatar Holding, Qatar’s sovereign wealth fund, which owns about 11 percent of Xstrata and is its second biggest shareholder, said last week that it wants Glencore to sweeten the offer. Until now, Glencore has refused to do so.
Qatar Holding built up its stake in Xstrata quietly this year after Glencore announced its ambition to merge with Xstrata to create the world’s biggest commodities enterprise.
Qatar said recently that it supports the principle of the deal, but wants the terms of the agreement to be altered from 2.8 new Glencore shares for every Xstrata share, to 3.25.
“Glencore confirms that it has received a proposal from the Board of Xstrata in relation to certain amendments to the management incentive arrangements… We are considering that proposal and will make a further announcement when appropriate,” Glencore said in a statement on June 27, the same day that Qatar said that it needs a higher offer.
The deal needs Qatar’s support to go through; the company holds up to 15% of Xstrata stock through its 11% stake and another 4% through investment vehicles. Apart from the valuation discrepancy, the tie-up has also been criticized of late due to Xstrata’s plan to pay out US$340 million in retention bonuses to its senior management after the merger goes through.
Analysts say it remains unclear whether Glencore will raise its bid as high as 3.25, a level that could destroy value for Glencore.
Level of 2.8 to 3.0 may be necessary
“We believe a bump – probably from 2.8 to 3.0 Glencore shares per Xstrata share – may be necessary to win over (Qatar) and other Xstrata shareholders,” Jefferies analysts said in a note.
The analysts continued, “[h]owever, we do not believe Glencore will bump to a ratio of 3.25 times. In our view, the news about Qatar requesting a bump and the recent strong shareholder opposition to the Xstrata management retention awards are problems. But … these are likely not insurmountable hurdles to the proposed Glencore Xstrata merger. A bump from Glencore and a revision to the management retention awards should be the logical next steps. We continue to expect this proposed merger to happen.”
A shareholder vote on the merger is set for mid-July. A decision on the deal is expected in early October, later than the previous deadline of the third quarter.
Some analysts think Glencore will compromise a little, but is unlikely to raise the offer to 3.25 shares.
Increase to three times possible
“We believe this deal is important for Glencore,” UBS AG analysts wrote in a report. “But we do not expect an increase to 3.25 times in the current macro and commodity environment. A bump to 3 times is possible.”
Ivan Glasenberg, Glencore’s CEO, will abandon the deal rather than raise his offer, The Telegraph reported.
Glasenberg, who owns nearly 16 percent of Glencore’s shares, is expected to meet Ahmad Mohamed al-Sayed, Qatar Holding’s managing director and CEO, this week to discuss the merger. The two men have not yet discussed the merger face-to-face.
The Glencore-Xstrata merger is expected to create a company “that will be active in 18 commodities, with operations in 33 countries, marketing in 40 countries, 101 mines, 25 smelters and 31 concentrators, plus significant logistics operations,” Platts reported.
Xstrata investor wants more profit
Xstrata investor Knight Vinke‘s surprise July 3 announcement that it supports Qatar’s call for more profitable terms in the merger created a new twist.
“The combination of these two factors leads Knight Vinke to support the comments of other large shareholders that an exchange ratio of 3.25 would represent more appropriate terms,” Knight Vinke said in a statement. It plans to vote against a deal based on the current ratio of 2.8.
Knight Vinke also said that “[i]f the board of Glencore is unwilling to pay for acquiring the control it seeks, we would support Xstrata’s continuing independence as a fundamentally strong and successful business – and one which would be likely to attract a significant premium were there subsequently to be interest from third parties.”
Securities Disclosure: I, Karan Kumar, do not have equity interest in any of the companies mentioned in this article.
