Pressure on Glencore-Xstrata merger

UK/Switzerland – A dent seems to have appeared in the much-discussed merger plans of leading Anglo-Swiss mining group Xstrata and Swiss commodities giant Glencore. They had set their sights on joining their assets – a prospect that had commentators already dubbing the proposed combined powerhouse ‘Glenstrata’. But with discontented shareholders becoming increasingly vocal, the outlook does not appear certain.

With a total value of Euro 68 billion, the merger would top the list of record-breaking business transactions. Xstrata is already 34% owned by Glencore and both firms are headquartered just a few miles apart. But some of Xstrata’s shareholders have vowed to oppose the deal, stating: ‘Although we see some merit in the merger, the proposed exchange ratio clearly undervalues Xstrata’s assets and future earnings contribution.’ As it currently stands, the merger values Xstrata at Euro 47 billion – a premium of almost 28% to its average price for the three months before the bid approach.

To get the green light, the merger would have to receive 75% approval by Xstrata shareholders, meaning that rebel shareholders would have to speak for only 16.5% of shares to derail the merger completely. And they are warning that they are strongly inclined to vote with a loud and resounding ‘no’ – ‘unless the merger terms for Xstrata shareholders are materially improved,’ says David Cumming, Head of Equities at Standard Life, a company which holds 1.92% worth in shares in the Swiss raw materials giant.

According to Richard Buxton, fellow shareholder and Head of Equities at Schroders, the merger is ‘simply unacceptable’, telling Reuters: ‘They keep describing it as a merger of equals, but then why don’t Xstrata shareholders get 50%?’ Mr Buxton adds: ‘We continue to think Xstrata’s assets and growth profile are superior to Glencore. We even had an opportunity to purchase Glencore shares at flotation and chose not to. That was the right decision.’

However, Mick Davis, Chief Executive of Xstrata, attempts to lay rumours of a hindered deal to rest with a brief response in The Guardian, insisting: ‘The opinions of the two critical shareholders are not representative of the majority. In fact, the silent majority find it intriguing and appealing.’