Glencore International Plc (GLEN)’s 16 billion pound ($25 billion) offer for the rest of Xstrata Plc is in doubt after the target’s second-largest shareholder demanded the bid be increased by 16 percent.
Qatar Holding LLC, which built an 11 percent stake in Zug, Switzerland-based Xstrata since February at a cost of about $4.3 billion, wants the agreed offer raised to 3.25 Glencore shares for each of Xstrata’s, compared with the current offer of 2.8 times, according to a statement yesterday.
The move from Qatar’s sovereign wealth fund pressures Glencore to sweeten the bid or walk away as it takes those dissatisfied with the terms to about 14 percent of Xstrata shareholders. That’s close to the 16.48 percent threshold that has the power to block the offer because U.K. takeover rules prevent Glencore from voting its shares in Xstrata.
“We now see an increase in the terms of the deal as a real possibility,” Bank of America Merrill Lynch analysts Jason Fairclough and Daniel Lian said today in a note to clients. “This could be a bit too close to call and we think that Glencore will have to consider Qatar’s comments carefully.”
Xstrata declined 2 percent to 770.2 pence at 10:39 a.m. in London trading. Glencore fell 4 percent to 290.65 pence.
“The shareholders obviously have sufficient size that Glencore and Xstrata will take notice,” said Tim Schroeders, a Melbourne-based fund manager at Pengana Capital Ltd., which oversees about $1.1 billion of assets. “If you are going to create an attractive entity for investors globally to invest in post-merger, there’s a fair bit of work to do in the next couple of weeks.”
Xstrata shareholders are scheduled to vote July 12 on the merger and proposed retention payments of as much as 172.8 million pounds to keep 73 Xstrata executives at the company. A decision going against either proposal would block the deal, which would create the world’s fourth-largest mining company.
Standard Life Plc (SL/) and Schroders Plc (SDR), which hold about 2.9 percent of Xstrata between them, have already said they would vote against the merger if Glencore didn’t boost its all-stock agreement.
Xstrata (XTA) has proposed changes to the retention payments, Glencore said in a statement today to the London Stock Exchange. Glencore is considering the proposal and will make an announcement “when appropriate,” it said.
Changes may include tying them more closely to the future performance of the combined company, people with knowledge of the situation have said, asking not to be identified because the talks are private.
The payments prompted a so-called red-top rating, the most serious corporate governance warning, from the Association of British Insurers, whose members represent about 17 percent of the U.K. stock market.
Xstrata stock may drop by about 20 percent should shareholders vote against the takeover as lower commodity prices and increasing political risk for its operations in Argentina and Peru have worsened the investment case for the company, Christopher LaFemina, an equity analyst at Jefferies International Ltd., said in an e-mail received yesterday.
Xstrata closed at 785.8 pence yesterday in London, compared with 1,230.5 pence on Feb. 2 when news of the offer broke. Glencore closed at 302.7 pence in London, down 34 percent from Feb. 2.
The Bloomberg Base Metals Spot Price Commodity Index, which measures the price of the six main metals traded in London, has fallen 16 percent since the deal was agreed amid concerns that growth in China and Europe will slow further.
“A bump, probably from 2.8 to 3.0 Glencore shares per Xstrata share, may be necessary to win over Qatar Holding and other Xstrata shareholders,” Jefferies said in the e-mail.
Glencore will probably raise the bid, said Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon Plc.
“If they want to salvage the deal, then the number has to start with a 3,” Shah said of the share-exchange ratio in a telephone interview yesterday. The companies also will revise the multimillion-pound retention payments to Xstrata executives that have drawn shareholder ire, he said.
Claire Divver, a spokeswoman for Xstrata, declined to comment. Charles Watenphul, a spokesman for Baar, Switzerland- based Glencore, declined to comment on the Qatar statement.
“An exchange ratio of 3.25 new Glencore shares for every one existing Xstrata share would provide a more appropriate distribution of benefits of the merger whilst properly recognizing the intrinsic stand-alone value of Xstrata,” Qatar Holding said in the statement.
Qatar Holding held 311 million shares in Xstrata, with derivatives and options taking its total stake to 10.98 percent, a June 14 filing shows. It had 66.6 million shares on Feb. 2, the day Glencore said it was considering an offer for Xstrata. Qatar is being advised by Lazard, according to its statement.
Glencore, the world’s largest publicly traded commodities supplier, is barred by the U.K.’s takeover code from voting its 33.65 percent stake in Xstrata. That means Xstrata investors with a joint 31.75 percent stake would be able to block the payment plan and holders with 16.48 percent could vote down the merger.
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