Glencore's (GLEN) soap opera courtship of Xstrata (XTA) delivered another bit of drama on Friday as the commodity trading giant offered improved merger terms mere hours before Xstrata shareholders were set to vote on the deal, once again delaying until a later, unspecified date an official ballot on the matter.
The revised terms increase the merger ratio to 3.05 Glencore shares (previously 2.8) for each Xstrata share. This is presumably in an effort to garner the support of recalcitrant sovereign wealth funds of Qatar (Xstrata's largest shareholder after Glencore with a 12% stake) and Norway, as well as other institutional shareholders that had publicly expressed an intent to vote down the deal unless the offer was improved.
The new ratio sees Glencore meeting Qatar a little more than halfway toward the 3.25 ratio Qatar had been publicly angling for. As we've previously discussed, our own assessment of relative value contribution pegs a fair ratio at 3.50.
Interestingly, according to the Financial Times, Glencore and Qatar had agreed to the revised terms at a "secret meeting" that kicked off Thursday evening in London and lasted into the early hours of Friday. If Qatar has indeed signed on to go along, a major roadblock to the merger has been removed.
In an added wrinkle, the revised offer apparently stipulates that current Glencore CEO Ivan Glasenberg would assume the CEO seat of the merged entity, whereas the original offer would have had Xstrata's CEO Mick Davis in the top job. This strikes us as a rather clever negotiating strategy. The Xstrata board and Davis himself had already lost credibility with shareholders by agreeing to the original deal, which included what many regarded as unfavourable terms for Xstrata investors but a lucrative "retention" package for Davis and other top executives. If the Xstrata board and Davis were to come out against the revised terms, which delivers a better outcome for shareholders but a step down in status for Davis, they might once again appear to be favouring their own interests ahead of shareholders, damaging their reputations in the process. In a way, we'd argue that by stipulating Glasenberg would ascend to the top job over Davis, Glencore has made the improved offer terms even harder for the Xstrata board to refuse.
With Qatar apparently on board, it seems more likely than not that a deal will get done. We plan to publish revised fair value estimates for Glencore and Xstrata that incorporate the revised deal terms.
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