br /> Jeff Largey
Commodities remain a growth story, and there is industrial logic behind a merger between the world’s leading commodities trading house and one of the world’s largest mining companies. The deal will create a vertically-integrated mining giant, with industry leading copper volume growth, and the ability to increase margins in Xstrata’s existing operations. The combined companies are targeting $500m (£309m) in revenue synergies, but we can see scope for these to increase over time. With Xstrata’s board recommending the revised Glencore offer, Xstrata shareholders will need to decide whether the share ratio is adequate compensation for Xstrata. If it does, then surely the £140m management incentive arrangement appears worthwhile to keep key Xstrata personnel in their seats. Otherwise, the risk of management flight poses risks to the long-term value proposition of the deal.
Jeff Largey is an analyst at Macquarie Bank.
The process from which the deal has emerged and been overseen is deeply disappointing. Proper consideration has not been given to the quality and value imbedded in Xstrata, and its good prospects as a stand-alone business. The extraordinary executive payments envisaged by the board, firmly incentivising the deal, merely exacerbate that concern. This takeover will ultimately see a significant change in culture, leadership, quality and risk profile for Xstrata shareholders. Any benefits seem to be heavily weighted in favour of Glencore. Giving away any expected future returns on their investment in Xstrata makes little sense for its shareholders. And exposure to Glencore can be accessed without need for this transaction. The case isn’t made and we are firmly opposed to this so-called merger, its terms and its implications.
Iain Richards is head of governance and responsible investment at Threadneedle Investments.