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Glenstrata? Why bother?

29 August 2012 By Kevin Allison

The market is giving up on a Glencore-Xstrata deal. A single Xstrata share was worth just 2.49 Glencore shares in early London trading on Aug. 29, after the Financial Times reported that a Norwegian sovereign wealth fund was against the proposed transaction. That’s the lowest ratio since January before the deal was announced – way below the 2.8 shares Glencore is offering for Xstrata, and nowhere near the 3.25 times that the Qataris have demanded ahead of a crucial vote on Sept. 7.

It’s no wonder the market is pricing in failure. Back in February, a bump to a 2.9 or 3 times exchange ratio looked doable. Half a year and a big swoon in the commodity markets later, there’s an argument for starting from scratch, with estimates for the fair value of each group, and the net synergies possible in the all-share deal.

Allow a generous $640 million of net synergies, and value the non-Xstrata bits of Glencore at a slight premium to Xstrata to reflect the insulating effect of its trading business against commodity price swings, and the deal looks challenging for Glencore today even at the original 2.8 times multiple, based on Breakingviews calculations using consensus 2013 earnings forecasts.

Of course, long-term investors like the Qataris might be more inclined to think about the next few decades rather than next year. Glencore’s limited track record on the public market also makes it hard to be sure its trading business really deserves a premium rating, although it’s safe to say that Glencore boss Ivan Glasenberg thinks so. As the company’s biggest shareholder, that may be all that matters. But the trading arm’s reassuringly resilient first-half performance gives him an excuse not to budge.

It’s hard to shake the feeling that things might be different had the shareholder vote taken place in July as originally planned, before attitudes hardened further. If the deal sinks, Xstrata chairman John Bond will face even more pressure to explain why he approved the original, egregious retention package for chief executive Mick Davis that fell flat with shareholders, forcing delay.

Glencore may yet make a final, modest sweetener. The market says otherwise, probably because it’s hard to see much justification. Xstrata’s hold-outs need to believe in its standalone value: that’s probably all they’ll be left with.


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