A merger between mining giant Anglo American and its Swiss counterpart Xstrata will leave shadowy commodities trader Glencore with a sizeable share in what could be one of the largest mining houses in the world.
Glencore is Xstrata’s largest shareholder, with a 34,45% share. Glencore stands to gain a 17% share in the proposed merged entity and could be its largest shareholder.
The company was established by infamous trader Marc Rich and acknowledged a 2008 turnover of $152-billion. If it were to list it could well rank as one of the largest companies in the world.
Rich, who was formerly investigated by authorities in the United States for alleged racketeering and tax evasion among other things, lived in Switzerland as a fugitive from justice between 1983 and 2001 before he received a pardon from former United States president Bill Clinton as one of his last actions before leaving office. Rich sold out of Glencore in 1993.
The Financial Times reported in June that Glencore’s secretive nature may have caused the cost of insuring its debt to rise 16-fold during the height of the financial crisis last year, after speculation on its liquidity. The situation has since corrected.
It is said the company is considering listing as a way to raise capital, but an initial public offering is not imminent.
In 2004 the Mail & Guardian reported Glencore’s run-in with the United Nations over the Iraq oil-for-food scandal involving Saddam Hussein’s flouting of sanctions to raise cash for arms. Glencore was a partner to empowerment company Imvume at the time.
Investigations by the M&G revealed how Imvume acquired a lucrative state tender to supply state oil firm PetroSA. Imvume then allegedly used money paid from PetroSA to fund the ANC’s 2004 election campaign.
Glencore maintains it adhered to all legal requirements in relation to the oil-for-food programme and investigations by Swiss authorities have stopped.
Talks of a merger between Xstrata and Anglo may have been played down by Anglo American, but Xstrata has by no means let up on the possibility of a joined entity.
Xstrata executives have been courting Anglo shareholders actively, if at the shareholders’ request, in a bid to educate them about the company and what it has to offer.
Xstrata’s general manager of strategy and corporate affairs, Thras Moraitis, told the M&G: ”Our proposal is out there, it is very clear, it’s very compelling and we’ll continue to spread the message.”
The evangelical note is perhaps not misplaced, given that Xstrata has to convert Anglo’s shareholders to its church, despite a nil premium offer based on its ”merger of equals” proposition.
Earlier this year, in a bid to raise cash, Xstrata announced a £4,1-billion rights issue. This coincided, however, with the purchase of coalmine Prodeco from Glencore for $2-billion.
The deal called into question the influence that Glencore has over Xstrata, something the company has strongly denied.
Media reports at the time suggested that shareholders were unhappy with Glencore’s apparent preferential treatment, which allowed it effectively to raise the money it needed to participate in the rights issue and remain Xstrata’s largest shareholder.
The deal included a call option allowing Glencore to buy the asset back on or before March 4 2010. If Glencore does repurchase, it must buy it back for $2,25-billion, ”plus all profits of Prodeco accrued but not distributed and the net amount of cash paid into Prodeco by [Xstrata]”.
Xstrata told the M&G the companies could ”not agree on an appropriate valuation of the assets and as a result included the call option”.
”The Call Option Agreement ensures that should the option be exercised, Glencore will pay a repurchase price that adequately compensates Xstrata’s shareholders for the option granted, providing a substantial cash injection and a return somewhere in the region of over 20% on the original acquisition price,” said company spokesperson Songezo Zibi.
”In our view these arrangements are fair to both parties.”
Despite Xstrata’s confidence in the deal, eyebrows were raised regarding Glencore’s apparent continued influence over Xstrata.
Glencore chairperson and erstwhile chief executive Willy Strothotte is Xstrata chair, while Glencore’s current chief executive, Ivan Glasenberg, is a non-executive director.
The overlap may raise a question about where the board’s fiduciary duty lies, said shareholder activist Theo Botha. He said a smaller stake in the proposed Anglo-Xstrata merged entity would mean less influence for Glencore as it comes up against Anglo management as well as Anglo’s corporate culture.
Xstrata’s dealings with Glencore are disclosed and carefully regulated.
Glencore is known to be an extremely efficient trader but as it is privately owned by management and key employers it has no cause to disclose its dealings or finances publically, leaving a pall of secrecy over its activities.
Whether Xstrata’s links with Glencore would harm its hopes of a merger remains to be seen.
Anglo has a secondary listing on the JSE, but Xstrata has indicated its willingness to list a merged entity on the JSE.
