Glencore Pays a Price for Xstrata Deal

Glencore is set to pay a larger premium than expected to seal its long-coveted merger with Xstrata, a move designed to defuse concerns among Xstrata investors about a cozy deal between the chief executives of the two companies.

The Glencore logo seen in front of the Swiss commodities giant's headquarters in Baar.
Sebastian Derungs | AFP | Getty Images
The Glencore logo seen in front of the Swiss commodities giant's headquarters in Baar.

The companies over the weekend hammered out the terms of an agreement on an $88 billion merger that would combine the world’s leading trading house with one of the biggest mining groups.

Under the agreement, which was still being finalized on Sunday night and is likely to be announced along with Xstrata’s annual results on Tuesday, investors in the miner would receive 2.8 Glencore shares for every Xstrata share they hold.

That ratio puts a greater relative value on Xstrata shares than most analysts or investors had expected, representing an 8 percent premium over the closing share price on Wednesday, when the ratio was 2.59.

Ivan Glasenberg and Mick Davis, the chief executives of Glencore and Xstrata, respectively, have also agreed the make-up of the combined company's board and senior management.

Sir John Bond, Xstrata’s chairman, will stay on as chairman of the enlarged group, while Tony Hayward, the former chief executive of BP, will be the senior independent director, according to people familiar with the negotiations. Trevor Reid of Xstrata is likely to be chief financial officer, with Mr Davis becoming the chief executive and Mr Glasenberg deputy chief executive.

The people warned, however, that the terms of the deal could still change.

The agreement marks the culmination of years of negotiation and sparring between Mr Glasenberg and Mr Davis, both known for their powerful egos.

It comes after some Xstrata shareholders, including Schroders , the UK fund manager, called for a larger premium to compensate for ceding control of their company. Glencore’s current shareholders would own 56 percent of the combined group, with Mr Glasenberg becoming the largest shareholder with a 9 percent stake. He and his 12 closest lieutenants at Glencore would control more than a quarter of the combined company, the world’s fourth-largest miner by market value and the leading producer of zinc, lead and ferrochrome, according to FT estimates.

People familiar with the negotiations said Mr Davis had pushed for a higher valuation for his company. “Mick has been able to extract a significant premium from Ivan,” said one person directly involved.

The relative valuation of the two companies has fluctuated since the trading house’s $10 billion flotation in May, with Glencore briefly eclipsing Xstrata in size as share prices tumbled last autumn.

The deal, which both companies have described as a “merger of equals”, is set to be implemented via a so-called “scheme of arrangement”, which requires 75 percent of shareholders to agree. This would differ from an offer to shareholders, which would only require 50 percent.

Three quarters of Xstrata’s shareholders would have to approve the deal – with Glencore’s 34 percent holding unable to vote — meaning that only 16.4 percent of Xstrata’s shareholders need to vote against the deal to block it.

Nonetheless, people involved in the discussions are confident of broad-based acceptance from shareholders, noting that many of the large institutional shareholders in Xstrata also own Glencore shares.

Additional reporting by Helen Thomas