Xstrata should accept revised Glencore pitch
By Kevin Allison
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Xstrata should accept Glencore‚Äôs revised $35.5 billion offer for the mining giant. What was originally billed as a merger of equals is now, for all practical purposes, a takeover at a modest premium. Changes to the proposed governance arrangements make the business combination look riskier than before. Glencore may have to pay up to convince Xstrata‚Äôs top people to take orders from its boss, Ivan Glasenberg, after his Xstrata counterpart Mick Davis leaves. But for all the recent animosity, this is a recommendable proposal.
Glencore‚Äôs final offer represents a 17-percent premium to the pre-deal status quo in February. That‚Äôs almost double the premium offered in the originally agreed merger. It may be short of the 30 to 40 percent typically expected in takeovers, but that reflects Glencore having partial control already via its existing 34-percent stake, which is also a deterrent to counterbids. It is also consistent with Glencore‚Äôs partial takeover of the Xstrata board: under the merger proposal, Davis was to be CEO under his exsiting chairman, John Bond. Now Davis will stay for only six months but Bond will continue – an astonishing reward given Bond‚Äôs poor handling of the merger process so far.
It looks more likely now that Xstrata‚Äôs top managers could follow Davis out the door. That‚Äôs a big worry given one rationale for the deal was to acquire Xstrata‚Äôs mining talent. Glencore has acknowledged as much, saying it will consult with Xstrata‚Äôs independent directors and shareholders on new incentives to prevent talent flight. It should be a solvable problem, at the right price. But it will take some delicate maneuvering given the blow up over Davis‚Äôs original retention bonus.
Xstrata may have to swallow its pride at the weakish premium. But a rival suitor is unlikely: Glencore‚Äôs blocking stake prevented Brazil‚Äôs Vale buying Xstrata in 2008. And the premium gains a few more percentage points when judged against Xstrata‚Äôs market value last week when investors were pricing in a high probability of deal failure. What‚Äôs more, Breakingviews‚Äô calculations show Xstrata shareholders are already getting the full value of the synergies.
Having originally agreed to a lower premium, Xstrata‚Äôs board will struggle not to recommend the sweetened terms, even with the governance changes. The changes may just accelerate the inevitable. It was questionable whether Davis would have stayed that long anyway. Of course, Xstrata‚Äôs shareholders – including the Qataris, with 12 percent – may feel they have the bit in their teeth. They have yet to weigh in. But Xstrata‚Äôs directors have a fiduciary duty to say yes.