February 6, 2012 / 11:23 AM / in 6 years

Glencore, Xstrata hammer out premium as deal nears

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.

“The key thing is the synergy that’s generated. If they get the deal done, it’s worth it,” he said.

Analysts at Credit Suisse estimate the synergies at around $468 million, roughly 5 percent of combined 2012 net income, thanks to a better use of Glencore’s marketing capabilities, and rating agencies are already pointing to an improved debt profile.

“For us it would be a mixture of cash and shares and it would be about the whole raison d‘etre and strategy going forward,” said one top-30 investor who declined to be named.

On Monday, Xstrata shares were off 1.8 percent, while Glencore was down 3.8 percent, against a 1 percent fall in the sector at 5:30 a.m. ET, but both were still above the level they were at before the deal was announced.

“Based on our analysis, an exchange of three Glencore shares per Xstrata share would be earnings accretive for Glencore and Xstrata shareholders,” Christopher LaFemina, analyst at Jefferies in London said.

“A smaller premium offer of 5-10 percent is probably coming and would likely be high enough to win over Xstrata shareholders as the strategic benefit of a merger should offset small earnings dilution (for them).”


Xstrata, in which Glencore already has a 34 percent stake, announced last week it had been approached by the world’s largest diversified commodities trader and was in talks over a deal that would be the largest in the sector since Rio Tinto’s takeover of Alcan in 2007.

The two, 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.

Rating agency Moody’s said on Monday that it saw a tie-up as positive for credit ratings, not least because of the simplified ownership structure, currently a “key credit negative.”

“In our view, Glencore’s current stake in Xstrata means that Xstrata cannot pursue equity-funded growth as easily as some of its peers could, should they wish to do so. The merger would remove this issue,” the agency said.

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, and would keep its chairman, City heavyweight John Bond, as well as its chief executive, Mick Davis, and its chief financial officer, Trevor Reid.

Glasenberg, who will be the largest single shareholder in the combined entity, is expected to hold a deputy position.

“Ivan is a money machine. He’s also an obscenely brilliant political animal. Mick’s a dealmaker. He’s not a politician,” the top-30 investor said. “So they are complementary.”

Reporting by Chris Vellacott in London, Narayanan Somasundaram in Sydney and Sonali Paul in Melbourne; Editing by Mark Bendeich and Chris Wickham

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