'GlenStrata' pipedream sinks amid conflicts

The mega-merger between Glencore and Xstrata appears cooked, with the latter's shareholders viewing the takeover in suspicious terms. But for Glencore's supremo this is no fatal failure.


The $US70 billion merger between Glencore and Xstrata (both of which have significant operations in Australian mining and agriculture) is wobbling and will collapse in the next few days if there is not a last-minute change of heart. So it's bye, bye 'GlenStrata' and another expensive resource pipedream joins BHP Billiton's failed $US140 billion bid for Rio Tinto and $US40 billion play for Potash Corporation of Canada.

For Australia, failure of the merger will focus attention on whether Xstrata (which has announced big capital spending cuts, like BHP and Rio Tinto) plans to go ahead with its huge thermal coal mining project at Wondoan in central Queensland. It is a multi-billion dollar project and is in the final phases of approvals. If the merger doesn't go ahead, as expected, will the project continue or become a victim of Xstrata's increasing conservatism?

News that the Norwegian sovereign wealth fund has jointed its Qatari counterpart as a major opponent of the huge deal has, in the mind of sharemarket investors, killed the merger in its present form. Only a major volte-face on the merger terms by Glencore management can save the huge transaction, but the time for altering the terms of the merger have now passed. All that Glencore (led by South African-Australian Ivan Glasenberg) has left to save the deal is to talk to those shareholders who remain strongly opposed to the deal happening in its present form. And that doesn't look like happening, after Glasenberg downplayed the importance of the merger at last week's earnings conference call with analysts. That's despite spending months on the hard sell with investors in both companies and the wider market.

The latest purchases of Xstrata shares by Norges Bank Investment Management (which is the manager behind Norway's wealth fund) were contained in shareholder notices and on the Xstrata website overnight. It now owns between 2.93 per cent and 2.97 per cent of Xstrata, which, with the near 12 per cent stake of the Qatari wealth fund, will be enough to sink the deal unless Glencore improves the current terms of 2.8 Glencore shares for every one Xstrata share. Other leading shareholders in Xstrata, such as Standard Life, Schroders and Knight Vinke have been reported as opposing the deal in its present form.

Investors marked down the price of Glencore and Xstrata shares to where the share ratio between Glencore and Xstrata had dropped to 2.44, the lowest since the deal was announced in February and well below the deal's ratio of 2.8 shares and the ratio demanded by Qatar of 3.25 (and other shareholders).

Glasenberg, Glencore's chief executive, and Mick Davis, his counterpart at Xstrata, now have just over a week to convince the wealth funds of Qatar and Norway of the bid's worth at the lower terms. That will be futile given that Glencore has had months to change the terms to meet the objections of big shareholders. The whole idea of the merger has been viewed cynically by shareholder groups and independent governance advisers as an attempt by Glasenberg and two other senior executives to grab control of Xstrata for themselves on the cheap.

In total, Glencore staff own 83 per cent of the company. Glasenberg dominates Glencore with his 16 per cent stake (and there's another 12 per cent held by two other senior executives and associates). The conflicts of interest in this set-up abound and Glasenberg has been exposed. A higher exchange ratio would dilute the interests of Glencore staff and management (and especially Glasenberg) in the merged company and give more voting power to the independent shareholders, like the two wealth funds.

The deal is dead, but like Marius Kloppers at BHP Billiton (with the failed Rio and Potash deals), Glasenberg will survive this failure. His 16 per cent stake underwrites that survival.

This story first appeared on www.crikey.com.au on August 30. Republished with permission.

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