[miningmx.com] — THE terms of Xstrata’s proposed merger with Glencore
were the best within the “realm of the possible,’ according to the global miner’s CEO
Mick Davis, who defended what some have labelled a lousy deal for shareholders.
Xstrata and Glencore on Tuesday officially announced an all-share merger deal worth
$90bn to combine the group’s respective commodity production and trading
businesses. According to the terms, Glencore would issue 2.8 new shares for each
Xstrata share – a ratio representing a 15.2% premium on Xstrata’s share price last
week prior to when leaks emerged about a pending deal.
The merged entity, to be called Glencore Xstrata, would be the tenth biggest firm on
the FTSE 100 on the current value, and would surpass Anglo American as the third
biggest commodities group on the index.
“An organisation that is well placed to not only supply commodities . but actually
operate in the supply chain, I think has a unique proposition,’ Davis told
shareholders, pointing to Glencore and Xstrata’s respective strengths.
“Glencore Xstrata would be the only company of significant size involved in that
[whole] chain. That is where the business is; that is where the optionality comes
from.’
Davis scoffed at criticism about the terms, saying they were the best possible given
that no cash payment would be involved in the so-called merger of equals.
“I’ve read in the newspaper . with some concern that I’m going to be fired and
voted off the board if I don’t produce the best terms for the company,’ he said. “So
I approach this stage with some trepidation obviously, because who wants to lose
their job on day one when you have announced such a fantastic deal, but have
screwed up on the terms?
“I didn’t go out to negotiate a premium with Ivan [Glasenberg, CEO of Glencore]; I’ve
negotiated a ratio,’ said Davis. “We had to pitch this ratio in a way that both share
prices could respond positively to this transaction. We achieved that.
“A tough negotiator, who could force his way and achieve dramatic premiums [only]
to face massive dilution simply erases the value proposition for himself.’
Apart from the $500m of synergies, Davis said the markets have already passed a
positive judgment on the deal, pointing to Xstrata’s share price gain of more than
13% in the past week. Glencore also gained 11% over the same period, although
both lost some ground again following Tuesday’s announcement – 3.3% and 2.2% for
Xstrata and Glencore respectively.
AGGRESSIVELY PURSUE DEALS
Glasenberg said Glencore’s presence would enable Xstrata to identify new mining
assets. “We deal with 8,000 suppliers around the world, and we are talking to them
every week,’ he said.
“When we do that we see opportunities someone else would not see. Most of the
acquisitions we’ve done over the years have been quiet deals that we’ve done with
our suppliers who we have a relationship with.
“We can get deals that others won’t.’
Davis concurred, saying the new group would continue to aggressively pursue
acquisitions.
“We have a combined entity that has much greater flexibility to be opportunistic and
capture the right opportunities when they are there.’
Davis and Xstrata’s Chairman, John Bond, would remain in their positions at the new
entity, with Glasenberg to become Deputy CEO.
Immediately after the announcement, two of Xstrata’s top 10 shareholders told
Reuters they would vote against the deal.
Standard Life Investments and Schroders, which together own 3.6% of Xstrata, said
the proposition undervalued their shares. “This is a fabulous deal for Glencore, it’s
probably a great deal for Xstrata management, but it’s a poor deal for Xstrata’s
majority shareholders,’ Shroders’ Richard Buxton told Reuters.
