Pressure begins to mount on Glencore over Xstrata merger

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Goldm mine

In another worrying sign for Ivan Glasenberg, CEO of Glencore, it has been made known to the press that US hedge fund Knight Vinke Asset Management LLC, a shareholder in Xstrata is to vote against the takeover of the British miner by Swiss commodities trader Glencore International Plc unless the terms of the deal are “materially” improved.

The statement comes after the one by Xstrata’s second-largest shareholder Qatar Holdings – with over 12% which said yesterday that it would not accept Glencore’s offer of 2.8 new shares for each Xstrata share held. The game of chicken continues between Glasenberg and major Xstrata shareholders

Ivan Glasenberg, Glencore CEO

Qatar has asked earlier for 3.25 Glencore shares for each Xstrata stock, saying that such a ratio would provide more appropriate benefits to shareholders. Glencorre currently holds 34% in Xstrata and agreed in February to buy the rest of the British miner by way of an all-share merger. Glencore is barred from voting their shares due to Takeover Panel rules and so Qatar’s current holding effectively puts them in the position of “king-maker”.

Both firms’ shareholders are due to vote on the transaction on 7 September and the latest shareholder to voice their opposition adds to the controversy that has surrounded this deal with many believing that Mick Davis’ £29m pay package, literally for turning up, is a step too far (we agree).

Knight Vinke said that unless Glencore is ready to “pay for the control of Xstrata”, it would back the miner’s independence and will consult with other shareholders about a shake-up of the board with the view of making Xstrata a “more robust and independent” business. Knight Vinke owns 0.5% of Xstrata according to Reuters data.

The planned merger is expected to create the world’s fourth biggest with a combined market capitalisation of just under £60bn.

Last year Qatar held talks with Glasenberg and his advisers about a so called “sweetheart” deal that would have seen the fund make a major investment in Glencore’s IPO. But, when Glencore finally floated, the order book for available shares was oversubscribed and Qatar was not given the allocation it thought it had been promised. There has been speculation that Qatar may hold a grudge about the perceived slight, although few outside the Gulf state can be certain of the fund’s true motivation. “There is very little transparency about why the Qataris are behaving this way,” added one banker working on the deal. “This could all be brinkmanship,” added another adviser.

We think an interesting arbitrage play is beginning to be presented here and which will conclude next Friday. I doubt that Glasenberg and Davis will let this deal slip and expect a late stage tweaking of the terms as we approach the deadline. With Xstrata currently up 3% at 927p the market is showing it’s expectations too. With Qatar Holdings publicly stating that they will buy upto 25% of Xstrata if the deal doesn’t go through then the downside in Xstrata is beginning to look limited. Any weakness early next week towards the late 800’s and a long trade has good odds of delivering a profit.


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