Glencore and Xstrata unveiled their ‘’merger of equals’’ overnight, although it’s not quite a merger of equals, and immediately had some institutional shareholders saying publicly that they might vote it down.
The proposal unveiled isn’t quite as might have been expected after Glencore approached Xstrata last week because it actually contains a takeover premium for Xstrata shareholders where in a true merger of equals there would have been none.
It is the size of that premium that has got some of Xstrata’s institutions agitated and threatening to vote down the deal. While it is only an eight per cent premium over the Xstrata share price ahead of the announced deal, the terms value Xstrata at 15.2 per cent more than it was valued at before the announcement last week and 27.9 per cent above Xstrata’s volume-weighted average price over the three months leading up to that announcement.
Glencore has to take the threat posed by dissenting shareholders seriously. To get the merger over the line it needs the support of 75 per cent of the non-Glencore Xstrata shareholdings. With Glencore owning 34.5 per cent of Xstrata, that means a ‘’no’’ vote from less than 17 per cent of the capital base could block the deal.
The difficulty for the dissenters is that Xstrata’s Mick Davis and his board have embraced the merger and its terms, so there won’t be corporate support for resistance to either the concept of the merger or its terms. Davis is such a central figure in the Xstrata story that his support – and the fact that he will be chief executive of the merged group – will sway a lot of shareholders.
Plus, of course, Glencore and Xstrata are already twinned via the Glencore shareholding and the reality that Glencore already has marketing rights over Xstrata’s coal production.
The concept itself is a rational one. Glencore is the world’s foremost commodities trader, while Xstrata owns a large portfolio of producing assets. The merger would give Glencore a far bigger exposure to hard resource assets and the ability to leverage its trading and supply chain expertise over a vastly bigger suite of assets.
Xstrata shareholders would get an exposure to the assets that Glencore does own and a merger would internalise and diversify the margins Glencore generates from its trading and logistics operations.
As Davis said, the resource sector landscape is changing quite rapidly. Producers are having to push into new and more remote and riskier jurisdictions in search of new large-scale resources. Demand has shifted from the developed world to the developing world. The commodities value chain, he said, was getting longer and more complex.
If merged, the group would not only be able to leverage Glencore’s market intelligence but its logistics infrastructure to capture more of that value. There would also, of course, be the conventional benefits of greater scale and diversity.
There is no doubt that trading expertise adds value for resource companies. After the BHP merger with Billiton, the merged group created its own marketing group with hubs in Singapore and Europe organised along customer sector lines. The group has no disclosed separate profit and loss account, but was once said to be generating earnings equivalent to about nine per cent of revenue. For a group with around $US70 billion of annual revenue, that’s material, and one assumes that the combination of the world’s biggest commodities trader with the enlarged asset and capital base could equally add value.