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Swiss commodities trader Glencore's logo is seen in front of its headquarters in Baar, near Zurich, Feb. 6, 2012. (ROMINA AMATO/REUTERS)
Swiss commodities trader Glencore's logo is seen in front of its headquarters in Baar, near Zurich, Feb. 6, 2012. (ROMINA AMATO/REUTERS)

Breakingviews

Glencore offer for Xstrata needs work Add to ...

Glenstrata needs a bit of a re-jig. The $90-billion (U.S.) trading-to-mining merger is off to a bad start, with two big Xstrata shareholders vowing to vote against Glencore’s current all-share offer. Misreading the mood on such a long-heralded combination is a black mark against the miner’s directors. But the deal makes sense and looks fixable – if both sides can agree on a bigger premium and a proper board. After all, the status quo suits neither.

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The naysayers, Schroders and Standard Life, together hold about 3.6 per cent of Xstrata’s shares. Their actual sway is greater, because the deal hinges on a “scheme of arrangement.” That means Glencore can’t vote its 34-per-cent stake and a quarter of outsiders, or 16 per cent of the register, could kill the deal.

But opposition appears mainly value-driven. Standard Life says the 2.8-for-1 share exchange ratio “clearly undervalues Xstrata’s assets and future earnings contribution.” So things looks better than, say, G4S’s tilt at ISS, Britain’s last big M&A revolt.

First, up the premium. A 30-per-cent sweetener, cash-takeover-style, isn’t necessary. But the existing 8-per-cent premium – based on the ratio alone – looks slim. The duo estimate $500-million of first-year synergies in EBITDA (earnings before interest, taxes, depreciation and amortization). That might be worth $400-million net, since it derives largely from the lightly taxed trading business. Glencore could swap shares at 2.9 for 1, or an 11.6-per-cent premium, without destroying value, Breakingviews calculations show. A double-digit premium would be affordable and cosmetically attractive. More synergies could justify a further boost. Liberum Capital reckons financing and head-office savings could add $400-million more to EBITDA.

Second, fix the governance. The combined entity is meant to be chaired by John Bond, currently Xstrata’s chairman. But the shareholder rebellion now makes him look insensitive to investor opinion. It would be better to bring in an outside heavyweight. That is all the more crucial if shareholders are to have comfort that the double-headed structure is to work, with Glencore’s Ivan Glasenberg being deputy CEO and president to Xstrata’s Mick Davis as CEO.

In spite of these hurdles, it would be brave to bet against the deal happening. The alternatives are worse. Glencore’s stake stops others bidding for Xstrata. And Glencore’s partner-led ownership limits its ability to fund big deals. A tie-up brings financial strength and less competition over the same assets. So the combination makes sense for both. They may just need to dig a little deeper to make it work for all shareholders.

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