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Glenstrata palaver

7 September 2012 By Kevin Allison

Memo to Ivan Glasenberg: this is not the way to do big public company M&A. The boss of Glencore has lobbed a last-minute curveball to save the commodity trader’s proposed merger with miner Xstrata, seeking more time to discuss sweetened terms. The clumsiness of the move creates the impression that Glasenberg can’t suppress his trader instincts when he needs to play the statesman CEO. It also augurs ill for any transaction that follows.

For almost two hours on Sept. 7, shares in both Glencore and Xstrata gyrated as investors were left wondering whether Glasenberg really would revise the terms of Glencore’s existing offer, which shareholders in Xstrata were poised to vote down. First Glencore adjourned its own shareholder vote on the merger proposal, then Xstrata delayed its meeting a few minutes. Then Xstrata announced that Glencore was dangling a fresh proposal. There was no detail from Glencore, no recommendation from Xstrata, and no word on what Qatar Holding, the leading refusenik on the deal, thought of it all.

This kind of drama might be expected in a hostile takeover. But this was an agreed deal, and Glencore has had months since the Qataris first announced their opposition to the original terms to negotiate an offer that works. It’s not blue chip, it’s slapdash – even if Tony Blair, an adviser to JPMorgan, has reportedly joined the discussions.

Xstrata says the Swiss trader is proposing to pay 3.05 of its shares for every Xstrata share it does not own, a 17 percent premium to the state of play on Feb. 1, and up from an original 2.8. A share-swap ratio beginning with a 3 was always seen as the magic number to get the deal done. On a Breakingviews analysis, it would be mildly value-destructive for Glencore, whose shares are now suffering.

But there are also new obstacles to a transaction. Xstrata says the new proposal envisages Glasenberg, not Xstrata Chief Executive Mick Davis, running the combined group. And Glencore might structure the transaction either as a takeover offer or a scheme of arrangement, as originally proposed. There was no word on what happens to Davis, who has the deeper experience in mining, and was previously deemed so critical to the combination’s success that he needed a $45 million retention package.

It all points to a broader concern. In most deals, companies that have agreed to tie the knot are able to work together to overcome unexpected roadblocks like recalcitrant shareholders. That is self-evidently not the case here. It only reinforces concerns about a culture clash between Xstrata’s miners and Glencore’s traders. If Davis and his top lieutenants had to be heavily incentivised to join a merged company that they would be running, what happens now that Glasenberg wants the CEO chair? And would Xstrata Chairman John Bond still head up the new board? This isn’t looking like a friendly business combination, whether takeover or merger.

The 11th-hour manoeuvring may yet produce a deal. A single Xstrata share was worth just 2.8 Glencore shares by midday, suggesting the investors who would hold paper in a combined company are yet to be convinced a deal will happen – or be desirable.


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