Glencore, Xstrata hammer out premium as deal nears

Mon Feb 6, 2012 6:47am EST
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By Victoria Howley and Clara Ferreira-Marques

LONDON/CAPE TOWN (Reuters) - Top executives at Glencore and Xstrata are hammering out the final details of a proposed $80 billion merger, including the premium on offer by the commodities trading giant to secure approval from the miner's shareholders.

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 percent.

Xstrata, the world's fourth-largest diversified miner, announced last week that it was in discussions with Glencore, already its single largest shareholder, confirming talks were back on after years of on-off negotiations, in a development expected by the market since the Glencore's $10 billion listing last May.

The premium on offer from Glencore, which is expected to detail the terms of the all-share deal as early as Tuesday, has been a point of disagreement in the past, and Xstrata shareholders have consistently said they will need to see a sweetener that recognizes the company's growth potential.

It is still unclear whether a premium of around 8 percent will draw enough support from independent Xstrata shareholders to push the deal through but some told Reuters the longer-term benefits of the deal could be enough to compensate for a minimal sweetener.

"Xstrata has higher quality assets with better growth prospects over the next five and ten years than Glencore," Richard Buxton, head of UK equities at fund manager Schroders said. "We therefore need to be adequately compensated for the dilution of that quality and growth."

Sources familiar with the discussions point to a jump in Xstrata's shares since the deal was announced, as by Friday's close, the stock was already up 33 percent against the average over the previous three months.

"Given the volatility in the share prices since the deal was announced, I wouldn't have thought an 8 percent premium would matter much," said John Robinson, chairman of Global Mining Investments (GMI), a fund managed by BlackRock with shares in both Glencore and Xstrata.   Continued...