‘Glenstrata’ merger on the rocks

Aug 29, 2012
<p>Natural resources deal of a decade might fall short as Qatar and Norway sovereign wealth funds acquire veto power</p>

Last February, commodities trader Glencore International and FTSE 100 mining company Xstrata announced their intention to merge in a plan to create ‘a new powerhouse in the global commodities business’.

The $70 bn deal, which was set to be one of the past decade’s largest in the natural resources sector, first encountered disapproval from two institutional investors, Standard Life Investments and Schroders, who called the offer ‘a poor deal for Xstrata’s minority shareholders’.

The most vocal opponent to the deal’s terms, however, has been sovereign wealth fund Qatar Holding, which requested that Glencore offer 3.25 of its shares for each Xstrata share, a far cry from the 2.8 ratio the company is proposing.

Since February, Qatar has been aggressively empowering itself against the merger, increasing its stake from 2.2 percent to 12 percent. This makes it Xstrata’s second-largest shareholder behind Glencore, which owns 34 percent.

It appears the tie-up is in serious jeopardy since Norges Bank Investment Management (NBIM), Norway’s oil-backed sovereign wealth fund manager, announced it was joining forces with Qatar Holding.

NBIM has spent more than $500 mn over the past few weeks to boost its stake in Xstrata to nearly 3 percent.

Qatar Holding and NBIM now have the de facto power to veto the merger, which would require a 75 percent majority at the upcoming shareholder vote in September. Indeed, since Glencore is barred from exercising its votes, the threshold for blocking the deal is as low as 16.5 percent.

Glencore is standing by its initial offer, with CEO Ivan Glasenberg even suggesting that the company is prepared to abandon the transaction, reports the Financial Times. ‘If it does not happen – no big deal,’ said Glasenberg in a recent conference call. ‘It is not the only deal that can be done.’

The news about the failed deal may, however, come as a double disappointment for Xstrata CEO Mick Davis, who could be awarded a £30 mn ($47 mn) retention package to head the new entity during the first three years post-merger.

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