New terms for Glencore-Xstrata deliver new problems

Marc Sidwell
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ANOTHER day, another twist in Glencore-Xstrata’s epic drama. It seemed for a few hours that Xstrata’s board might have done the trick, recommending the bid with a new share multiple and terms that include allowing shareholders the option of rejecting the planned £144m retention awards for senior Xstrata managers. Then Knight Vinke Asset Management, which had rejected yesterday’s revised offer when it was mooted in September, reiterated its objection and claimed the Xstrata board’s independence was in question.

Knight Vinke does not have the power on its own to vote the deal down, but then again neither do the independent Xstrata non-executive directors, who have irrevocably committed to vote for the deal with their Xstrata shares, all 0.1 per cent of them. Under the rules of the vote, the board has to convince 49.4 per cent of shareholders, excluding Glencore, to follow suit. Knight Vinke, which owns 0.51 per cent of Xstrata, has to convince just 15.99 per cent to reject the offer.

With no other deal on the table, such a rejection could seem perverse. But not to an Xstrata shareholder convinced of the firm’s intrinsic value and growth potential and wary of the prospect of Glencore shareholders reaping the benefit at too cheap a price.

As it is, the new offer appears set to compensate Xstrata’s senior management handsomely. Even Mick Davis, who will now have to depart as chief executive after six months, can’t complain too much as he is getting his contractual £9.6m severance pay. But the question is, whether or not the compensation package is voted down, will the tie-up compensate shareholders handsomely enough? The new share ratio of 3.05 shares in the merged group for every Xstrata share held is somewhat short of the 3.25 multiple Qatari Holding called for and which Knight Vinke also sees as more suitable. While 3.05 would give current Xstrata shareholders other than Glencore a 47.4 per cent stake in the new group, that leaves them tantalisingly short of a majority – and, after six months, with Glencore’s chief executive Ivan Glasenberg at the helm.

Nor is the vote the only concern. As yesterday’s release made clear, this merger remains conditional on the approval of several competition authorities, crucially South Africa, China and the European Commission. Australia has already given approval, and the hope is for others to follow in short order. But South Africa’s Competition Tribunal was reported to have extended its review of the merger only last week. The drawn-out experience of Walmart’s acquisition of Massmart this year provides some precedent for worry. Europe and China also have the potential to upset the applecart if either feels that creating a giant able to rival Rio Tinto, BHP Billiton, Vale and Anglo American would tilt the playing field too far.

But despite fresh uncertainties, this deal still looks in better shape than it has for a while. And we even have a tentative date. If all goes well, look to see Glenstrata testing its mettle before 31 December 2012.