Bloomberg News

Xstrata Investors Seen Backing Glencore Takeover

November 20, 2012

Xstrata Investors Seen Backing Glencore Takeover in Biggest Deal

The shared building that houses the headquarters of Xstrata Plc stands in Zug, Switzerland. Xstrata advanced 0.7 percent to close at 956.8 pence yesterday in London trading. Glencore rose 1.6 percent to 326.6 pence. Photographer: Gianluca Colla/Bloomberg

Trading in Xstrata Plc (XTA) shows that investors, who vote today on 2012’s biggest takeover, have almost never been more confident that Glencore International Plc’s 19.5 billion-pound ($31 billion) bid will win approval.

Xstrata shares advanced to 2.95 times higher than those of Baar, Switzerland-based Glencore at 9:15 a.m. in London trading. The ratio reached a record of 2.96 on Nov. 16. Investors in commodities trader Glencore, which already owns 34 percent of Xstrata, voted 99.4 percent in favor of the deal today at a meeting in Zug, near Zurich.

Balloting of Xstrata holders is spread over two meetings, commencing at 2 p.m. local time in Zug. Glencore sweetened its all-stock offer in September to 3.05 shares for each one in Xstrata to win support from Qatar’s sovereign wealth fund, holder of a 12 percent stake in the world’s largest exporter of power-station coal. There’s a 90 percent chance the acquisition will be approved, according to SBG Securities Ltd.

“I don’t think there are enough minorities to vote it down,” Peter Davey, a London-based analyst at SBG, a unit of Standard Bank Group Ltd., Africa’s largest lender, said in an interview. “The revised offer does make it more attractive for Xstrata shareholders to take. I’ve warmed to the idea of the combined unit.”

FTSE Ranking

Xstrata advanced 1.9 percent to 974.8 pence at 9:17 a.m. in London trading. Glencore rose 1.3 percent to 330.85 pence. The combined group will be the world’s fourth-largest mining company. It will represent about 2.1 percent of the U.K.’s benchmark FTSE 100 Index, ranking it 13th in the gauge, Liberum Capital Ltd. wrote today in a note.

The gap between credit-default swaps on Glencore and Xstrata narrowed to 50 basis points, the lowest since Feb. 6. Glencore (GLEN) credit-default swaps fell 7 basis points to 212, the lowest since June 14, while Xstrata’s dropped 1 basis point to 162, the lowest since Nov. 15.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Qatar Holding LLC, Xstrata’s second-largest shareholder, said last week it will vote in favor of both of two resolutions on Glencore’s offer. The first resolution backs the deal along with 144 million pounds of retention bonuses for about 70 Xstrata employees. The second supports the acquisition without the incentives. Both need 75 percent support to be passed.

Qatar Abstains

Qatar plans to abstain from a third resolution that focuses solely on the payments for Xstrata managers. That boosts the likelihood of both the deal completing and the payouts being blocked, given opposition from other shareholders, Liberum Capital Ltd. said Nov. 15.

If the incentives are rejected in a vote that requires a simple majority, there’s a great risk of key Xstrata managers leaving the combined company, Macquarie Group Ltd. said in a note to clients last week.

Glencore will likely seek to retain key Xstrata managers should investors reject the current incentives proposals, people familiar with the matter said last week. The commodities trader would offer to retain fewer managers than the number covered by the current package to be voted on today, the people said.

Investors holding as little as 16.48 percent of Xstrata can block the transaction because U.K. takeover rules prevent Baar, Switzerland-based Glencore from voting its 34 percent stake in Xstrata.

Zinc, Copper

The offer, increased in September from 2.8 Glencore shares, is still opposed by some Xstrata investors including Knight Vinke Asset Management LLC. Shareholder advisory groups are also divided. Pensions & Investment Research Consultants Ltd. recommended opposing the deal. Institutional Shareholder Services Inc. and Glass Lewis urged investors to support it, while calling for the bonuses to be rejected.

The takeover will add Xstrata’s coal, nickel, zinc and copper operations to Glencore’s cotton-to-crude-oil commodities trading empire. The combined entity will have interests in about 35 coal mines in Colombia, Africa and Australia, and account for about 10 percent of global seaborne exports of the fuel.

It would be the world’s third-biggest producer of mined copper, the largest zinc miner, and the biggest exporter of coal burned by power stations. The combined group also would have about 11 percent of the 13 million-ton global zinc market and about 40 percent of the 1.9 million tons of the metal produced in Europe.

EU Approval

Completion of the deal is still subject to approvals from regulators including the European Commission, which has until Nov. 22 to rule. The regulator will likely focus on the combined company’s influence in the zinc market, SBG’s Davey said.

The two companies have said they expect the transaction to be closed by the end of the year. Glencore shareholders today approved changing the company’s name to Glencore Xstrata International Plc.

Qatar Holding is advised by Lazard & Co. Glencore is working with Citigroup Inc. and Morgan Stanley as financial advisers. Xstrata has hired Goldman Sachs Group Inc., JPMorgan Chase & Co., Deutsche Bank AG and Nomura Bank International Plc.

To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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