Xstrata shareholders demand more from Glencore

Two leading shareholders in Xstrata have threatened to vote against its proposed mega merger with Glencore, saying the deal undervalues the mining group.

Standard Life and Schroders, which both own 3.6% of Xstrata, support the aim of combining the world’s fourth largest miner with Glencore, the world’s largest commodities trader, to create an industry powerhouse. However, they say the ‘merger of equals’ sells Xstrata investors short.

The investors voiced their objections after the Swiss-based companies this morning announced the terms under which Glencore means to buy the remaining 66% of Xstrata it does not already own for $41 billion (£26 billion).

Glencore will issue 2.8 new shares for each Xstrata share, giving Xstrata shareholders 45% of the enlarged group which will be renamed Glencore Xstrata International.

The deal values Xstrata, a member of Citywire Top Stocks®, at around $62 billion (£39 billion), which is just over 15% more than its market value last week before news of the merger talks broke.

Although Xstrata is the business being acquired, its managers get most of the key jobs. Its chief executive Mick Davis becomes CEO of the enlarged group while Xstrata chairman John Bond and chief financial officer Trevor Reid will retain their posts. Glencore’s chief executive Ivan Glasenberg, who became a billionaire last year through the company’s $10 billion flotation, will become president and deputy CEO of the new company. 

Standard Life said it would push for the terms to be sweetened.

David Cumming, head of equities at Standard Life Investments, said: ‘Although we see some merit in the merger of Xstrata and Glencore the proposed exchange ratio clearly undervalues Xstrata's assets and future earnings contribution. Consequently it is our intention to vote against the deal unless the merger terms for Xstrata shareholders are materially improved.’

Richard Buxton of Schroders agreed: ‘This is a fabulous deal for Glencore, it's probably a great deal for the Xstrata management, but it's a poor deal for Xstrata's majority shareholders,’ he told Reuters. 

Disappointment and doubt about the deal saw shares in both groups drop with Xstrata (XTA.L) down 35.5p, or 2.8%, to £12.25 and Glencore (GLEN.L) slipping 5.5p, or 1.2%, to 455.2p

Richard Knight, an analyst at Liberum Capital, felt shareholder objections were unjustified. ‘With Xstrata getting the three top jobs and a small premium we fail to see how Xstrata shareholders have come out poorly here. They gain access to some very fast growing assets and a world class trading platform and the shareholder tensions that have dogged the company since the failed sale to Vale in 2008 have been killed once and for all.’

Glasenberg defended the deal saying: ‘This is a natural merger which will realise immediate and ongoing value from marketing the combined group's products to maximise arbitrage opportunities, blending, swapping and storing to meet customer needs more exactly,’ he said.