The world's largest proposed takeover of the year – a tie-up between Swiss commodities giants Xstrata PLC and Glencore International PLC – will likely fail when it goes to a vote on Friday, as key shareholders hold out for a higher price despite an industry slowdown.
Commodities trading giant Glencore is offering a little over $30-billion (U.S.) in shares to take over Xstrata, the mining company that went public nearly a decade ago and which quickly grew into one of the world's largest metals producers. Glencore is offering 2.8 shares in the new company for each share of Xstrata.
"Financial markets are expecting the Sept. 7 vote by Xstrata shareholders to end in defeat for Glencore, with less than the minimum 75 per cent of the vote on the day voting in favour (unless Glencore changes merger ratios at the very last moment)," Tony Robson, an analyst for BMO Nesbitt Burns Inc., wrote in a report on Thursday.
A combination of Xstrata and Glencore would create a new global commodities giant that could compete across industry groups with the likes of BHP Billiton Ltd., the world's largest miner, and its close rivals Rio Tinto PLC and Vale SA.
A deal between the companies had appeared set for easy approval until mid-June, when shareholder Qatar Holdings, a global investment house founded by the Qatar Investment Authority, came out as a surprise opponent.
Qatar, which has built its position in Xstrata from 3 per cent in February to about 12 per cent today – says it wants an exchange ratio of 3.25 new shares for each existing Xstrata share. Major shareholder Norges Bank Investment Management, a Norwegian sovereign fund, and other shareholders are also calling for a better deal.
Glencore, which already owns 34 per cent of Xstrata, has said its offer is fair, although it held talks with Qatar and other shareholders over the summer to discuss the deal.
"QH announces that, although it continues to support the principle of a combination of Glencore with Xstrata, it has determined that it will not support the proposed merger terms of 2.8 new Glencore shares for every one existing Xstrata share," Qatar said last week. "Accordingly, QH will vote its entire shareholding in Xstrata against the proposed scheme and merger terms at the scheme meeting and extraordinary general meeting of Xstrata to be held on 7th September, 2012."
Glencore, a London-listed company with market capitalization of some £27.4-billion pounds ($43.7-billion), is based in Baar, Switzerland, and has evolved from a small firm founded by one-time fugitive Marc Rich into a global power in commodities trading. The company went public in one of the most heralded initial public offerings of 2011, and barely a year later launched a $6.1-billion (Canadian) friendly takeover of Viterra Inc., Canada's biggest grain handler.
Xstrata, also London-listed, is worth £29.4-billion ($46.8-billion U.S.), and has grown quickly since it went public in 2002 and launched a takeover offensive of mining assets, including Toronto-based Falconbridge Ltd. in 2006. It is a dominant miner of zinc, copper, thermal coal – and nickel.
Analysts say debt-burdened Glencore needs Xstrata for its cash-generating portfolio of long-life mines in safe jurisdictions. They say Xstrata could benefit from Glencore's powerful marketing machine, proven across its agricultural, oil and gas and metals divisions.
The Qatar Group said as recently as Aug. 30 that it was not opposed to the rationale behind a deal with Glencore, only to the price it is offering.
"QH believes that Xstrata has a strong future, whether in combination with Glencore on acceptable terms or as a stand-alone entity, and that its shares represent an attractive long-term investment," the fund said.
There was some market speculation on Thursday that Glencore might raise its bid in the final hours before Xstrata shareholders are due to vote on the existing offer on Friday morning. If it were to do that, however, a vote would have to be adjourned to give shareholders time to ponder a new offer.