Glencore tells Xstrata investors its bid is final

Glencore, which already owns just over a third of Xstrata, confirmed its bid was now at 3.05 new shares for every Xstrata share held. This is up from 2.8 and in line with proposals made on Friday, following an unexpected turnaround that ended months of stalemate with the miner's second-largest investor, Qatar.

That level represents a 27% premium to the ratio at which Glencore and Xstrata were trading last week, when the market believed the deal would collapse.

"Glencore confirms that it is an all-share merger, and it will not increase the merger ratio further," the trading company said. "The increased merger ratio represents a substantial premium for a company with a 34% shareholder."

The offer released after a weekend of intense negotiations has been seen by those close to the deal as more conciliatory and less aggressive than proposals presented to Xstrata's board on Friday, just minutes before the miner's shareholders were due to vote on Glencore's original bid.

Glencore's chief executive and top shareholder Ivan Glasenberg still demands the top job in the combined entity, but the deal now retains a merger structure unless a change is approved by Xstrata – rather than shifting to a straightforward takeover requiring a simple majority to approve the bid.

Original bid
It also provides for a balanced board, as in the original bid made in February, and makes the deal conditional on a retention scheme for the miner's senior managers – easing concerns about the operational risk of changes at the top.

Shares in Xstrata were up 2.4% at 1,038.5 pence at 11:20am GMT, outperforming a 1.8% rise in the UK mining sector, while Glencore was down 1.2%. At those levels, the shares are trading around a higher ratio of 2.8, which would indicate the market is assigning a greater possibility that the deal will happen.

Qatar, which demanded in June a ratio of 3.25 to approve the deal, was considering its position on Monday after what one source familiar with the deal described as Glencore's "curveball" last week. Several sources had said Qatar was surprised by some of Glencore's provisions in Friday's proposal, including the departure of Xstrata Chief Executive Mick Davis, who has been implicitly backed by Qatar so far.

"Neither Davis going, nor the 3.05 were what the Qataris had in mind when they put their heads above the parapet in June," the source asked. "This is taking some thinking."

Xstrata, for its part, said its independent directors were considering the fresh bid and would respond by 6am GMT on September 24 after consulting with major shareholders. At least one source involved in the deal said a response could come before then.

Supporting the offer
"The interesting dilemma is going to be that the Xstrata board, having supported the offer at 2.8 and now being presented with an offer at 3.05, is going to find it pretty hard to refuse it," said John Robinson, chairperson of Global Mining Investments, a fund managed by BlackRock, Glencore's biggest investment management shareholder. "It now comes down to personalities."

One of Xstrata's 40 largest investors added: "The deal looks much more likely to happen now. I'd be surprised if the independent Xstrata directors say no."

In line with proposals on Friday, Glencore's Glasenberg would take the top job at the expense of Xstrata boss Davis, a mining industry veteran who would have taken the chief executive role under the original offer. Davis, already one of the best-paid chief executives of the FTSE 100, was left bruised by a package to keep him in is job that was deemed too generous, and by Xstrata's decision to back a deal many investors disowned.

Glasenberg – said by one source close to the deal to have "pounced" on the opportunity to oust his long-time rival – will take over after an interim period of six months. Davis has held the top job at Xstrata for a decade, building it up from a $500-million collection of zinc and ferrochrome assets into the world's fourth-largest diversified miner.

Xstrata is on the cusp of a period of production growth, as it moves from older, more expensive mines to newer, more efficient projects, boosting volumes by 50% by 2014.

"The thing [Davis] was brought in to do, he's done. He's a dealmaker. He's not an operator," said one of Xstrata's top 30 shareholders. "[Xstrata's] operators, who bring these things in on time and in the money – compared to most other people – they're the brilliant guys and they're staying."

In a gesture to appease both the independent directors and shareholders fretting over management of these projects, Glencore said it would keep a retention scheme for top managers.

Glencore signalled it could change a package, seen by some investors as too generous. One source said that could involve setting tougher performance targets.

Xstrata chairperson John Bond will keep the job in the combined group, as under the original proposals, and the board will be drawn evenly from the two companies.

A former chairperson of Vodafone and HSBC, Bond is considered a steadier hand than Glencore chairman Simon Murray, but has also been criticised by some minority shareholders for recommending the initial Glencore offer.

Glencore made a long-awaited takeover bid for Xstrata in February. But the offer ran into trouble and had been expected to fail as shareholders prepared to vote last Friday, with Qatar and other investors opposed the terms of the deal.

The impasse was resolved in late-night talks at a London hotel, facilitated by former British prime minister Tony Blair. – Reuters

Clara ferreira marques
Clara ferreira marques works from Singapore. Columnist for Reuters Breakingviews in Singapore. All things commodities, SE Asia and more. Previously London, Milan, Moscow, Mumbai. Comments are my own. Clara ferreira marques has over 855 followers on Twitter.

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