The biggest takeover of the year looks set to go ahead after Anglo-Swiss mining giant Xstrata PLC recommended that its shareholders vote in favour of Glencore International's overhauled merger proposal.
The deal, which was held up for half-a-year because of fights over price and executive pay, would value the combined group at about $80-billion (U.S.), based on current trading prices. It would vault the new company into mining's super leagues, where it would compete with BHP Billiton, Rio Tinto, Vale and Anglo American. Xstrata boss Mick Davis and his Glencore counterpart, Ivan Glasenberg, have made no secret of their desire to own Anglo American; Xstrata tried to buy Anglo in 2009, but was rejected.
While the Xstrata-Glencore merger will almost certainly go ahead, risks abound. Glencore is primarily a trading and logistics company and Xstrata is a miner – it is the biggest exporter of thermal coal. Putting the two together is bound to create some cultural and operational tensions, all the more so since the new group is to be run by Mr. Glasenberg even though Glencore is smaller than Xstrata.
The bigger question is the enduring strength of the commodities "supercycle" as China's growth rates come down. Mr. Davis's bet that commodities were on a "stronger for longer" run certainly proved true in the last decade, when he built Xstrata from virtually nothing, but prices for some metals have dropped this year amid uneven demand.
The merger of Xstrata and Glencore was always likely, if only because Glencore owns 34 per cent of Xstrata and their bosses were like-minded about the commodities cycle and the need to move forcefully when major targets presented themselves. (The Canadian government recently approved Glencore's $6.1-billion takeover of agribusiness company Viterra, of Regina.) London-listed Xstrata grew quickly after it went public in 2002 and embarked on a wave of takeovers that included Toronto-based Falconbridge Ltd. in 2006. It is a dominant miner of zinc, copper, thermal coal – and nickel.
Glencore bid for Xstrata in February and the takeover attempt immediately ran into problems. Shareholders, notably the Qatari sovereign wealth fund, which owns 12 per cent of Xstrata, making it the second-biggest investor, wanted a sweetened deal. Eventually, Glencore raised is bid from 2.8 of its own shares for every Xstrata share to 3.05 shares. Qatar Holdings made no comment on Monday, but analysts expect it and other key shareholders will likely accept the board recommendation because they were consulted by Xstrata directors in recent days and weeks.
The compensation issue – specifically lavish retention pay – was a potential deal-breaker too. At first, the companies insisted that the retention packages and the merger needed to be approved together for the deal to proceed. Under the revised terms the vote on the retention packages and the deal are to be "de-coupled."
Since its initial public offering in May, 2011, Glencore has not had an easy ride on the London Stock Exchange. The shares lost 25 per cent last year and another 13 per cent this year, vastly underperforming the FTSE-100 index.
Commodities have in fact been rising since June, when the U.S. Federal Reserve indicated that further economic stimulus was in the works. Since then, commodities, broadly speaking, are up by about 15 per cent. But they have been falling since about mid-September and any more data that suggests Chinese growth is waning could push down prices again, perhaps drastically.
The Glencore-Xstrata merger is not a done deal. In a process that could take months, it still requires the approval of shareholders and anti-trust authorities in countries from Europe to South Africa and China.