/ 14 September 2012

Glencore sweetens Xstrata offer

Glencore chief executive Ivan Glasenberg and chair Simon Murray after a company shareholder meeting.
Glencore chief executive Ivan Glasenberg and chair Simon Murray after a company shareholder meeting.

Finally, it took the intervention of Tony Blair to break the impasse – a standoff that almost everyone assumed had ended the £56-billion deal that Glencore boss Ivan Glasenberg had been dreaming of for five years.

Last Thursday night in London (September 6), the former prime minister brought together Glasenberg and the oil-rich Qatari investors who had been ready to kill off his master plan to merge his global commodity trading house with the mining giant Xstrata.  

That deal would create a group that is the world's largest producer of zinc, controls just less than a third of the coal used for power stations and trades wheat, sugar and oil in more than 40 countries, putting it at the centre of the global trade in vital commodities.

The previously little-known billionaire had endured the publicity generated by floating Glencore last year mainly to pursue the "merger of equals" with Xstrata. He even seemed prepared to give up being chief executive of the newly created commodities powerhouse, ceding the role to his long-standing friend and rival Mick Davis, the Xstrata boss.

Indeed, so friendly was the arrangement that Davis was lined up for a £50-million retention package – and it was there that the snags started. Investors, already buoyed by a newly discovered sense of rebellion in the "shareholder spring", were furious at Davis's potential rewards. But when Glasenberg went on the offensive to defend the merger during a speech to the London dinner of the Melbourne Mining Club in June, he ended by courting more controversy: "Thank God my partners were entrepreneurs," he said. "They want to work in a company that looks towards the long term – that wants to take advantage of a cheap asset that becomes available … So really, that's the real reason we went public."

Natural resources
It was already known before Glasenberg took to the stage that Glencore's listing had been designed to create a vehicle that could use paper, rather than cash, to buy access to natural resources. But what Glasenberg also appeared to be saying was that he thought Xstrata was cheap – so cheap, in fact, that he was willing to give up running the company in which he was to be the largest shareholder. The problem with such a line was obvious: other Xstrata shareholders might also suspect that Glasenberg could be underpaying. The Qataris certainly did.

In February, when Xstrata and Glencore confirmed one of the sector's worst-kept secrets and finally announced plans for a merger, the proposed terms of 2.8 Glencore shares for every Xstrata share did appear slightly stingy.

Sitting quietly in the background was Qatar Holding – the sovereign wealth fund that owns Harrods plus large stakes in Barclays and Sainsbury's, among other high-­profile investments. It then held about 3% of Xstrata and that stake began to edge up.

Then, just less than three weeks after Glasenberg's after-dinner speech, the bombshell was dropped. After diverting spats over executive pay, price was back at the top of the agenda. Xstrata's announcement of a revision in the controversial terms of Davis's retention contract almost directly coincided with a statement from Qatar that it would require Glencore to pay more. Much more. Rather than exchange every Xstrata share for 2.8 Glencore shares, Qatar Holding wanted 3.25.

Even in an industry used to explosives, this was dynamite. By now Qatar held 10% of the miner and because Glencore was barred from voting its own 34% on the merger, it immediately looked like a blocking stake. That seemed even more true by the end of last month, by which time Qatar owned 12% of Xstrata. Even so, Glasenberg – who had started insisting Xstrata was not a "must-do deal" – refused to board a plane to Doha to negotiate. There is a sense that he may have been reluctant to repeat the trip, because previous efforts to sell Glencore to Qatari investors had fallen short after he was rebuffed by the sovereign wealth fund at the commodity trader's 2011 flotation.

Lengthy process
Those close to the Qataris also suggest the pitch alerted the emirate to another investment because Glencore had a 34% stake in Xstrata. Quite why the fund preferred Xstrata to Glencore is not clear. However, according to those who have worked with it, dealing with Qatar Holding can be a lengthy process and the fund can eschew investments that might cause it embarrassment, especially in the West.

Glencore, on the other hand, is a controversial company even in such a controversial sector. When Glasenberg admitted publicly in April that the City viewed his company's assets as lower quality, it was essentially an acknowledgment that Glencore owned projects in territories from which other FTSE 100 companies might have shied away. In May, Glencore was asked by non-governmental organisation Global Witness to explain alleged "potentially corrupt deals" in the Democratic Republic of Congo with partner Dan Gertler. In June, a Glencore subsidiary hit trouble when it was fined €500 000 by a Belgian court for bribing European Union officials to obtain market-sensitive information.

Whatever Blair said to Glasenberg last Thursday night, it was enough to overcome the arch-trader's refusal to budge on price. Even as the meeting to vote on the deal got under way at Glencore's Swiss headquarters in Zug last Friday, he shifted part of the way towards the Qataris' demands. Now he is offering 3.05 shares – but on condition he gets to be the boss.

In June, Glasenberg asked: "If I wasn't a shareholder and just the CEO of Glencore, why the hell would I do the deal when I get to lose my CEO job?" Mick Davis and his camp may now be asking the same question.

Twists and turns in megadeal

Activist investor Knight Vinke has rejected an improved offer for mining company Xstrata from commodities trader Glencore, which was expected to release further details of its now hostile £56-billion take­over proposal this week, with a full offer document to follow at a later date.

It will be the latest twist in a long-running megadeal that began as a friendly merger of equals, which turned sour over accusations of excessive rewards for management.

In an announcement to the London Stock Exchange, Glencore will flesh out the new terms that its chief executive, Ivan Glasenberg, put to both his and Xstrata's shareholders in an 11th-hour intervention on September 7.

This will not constitute a firm takeover offer or start the clock ticking on a new deadline in the process. Takeovers must be approved within 60 days of an offer being made, according to United Kingdom rules.

The new terms offered by Glencore included an increase in the offer price from 2.8 shares in the new company for each existing Xstrata share to 3.05 shares and, controversially, the removal of a promise to make Xstrata boss Mick Davis chief executive of the merged group.

In a statement released on September 8, Knight Vinke rejected Glencore's improved price, saying "the value of Xstrata is substantially more than Glencore is proposing today". The mining company is due to generate a threefold increase in earnings over the next two years, the only one of its peer group to have such a growth profile, said David Trenchard, vice-chairperson of Knight Vinke, which is a top 20 Xstrata shareholder with just less than 0.7% of the stock. Trenchard also called for a "substantial increase" to the price, given that Glencore's offer has changed from a merger to a takeover with a corresponding management overhaul, and now represents a change of control at Xstrata.

Xstrata and its key 12% shareholder, the Qatar sovereign wealth fund, are understood to have been surprised by Glencore's stipulation that Davis would no longer lead the merged company as originally proposed. The Qataris are understood to be supportive of the mining group's successful management team. –  Juliette Garside, © Guardian News & Media 2012