Billionaire loses high-risk stand-off over mining merger

Glencore's Ivan Glasenberg is preparing to say goodbye, at least for now, to his Xstrata dream. Mark Leftly reports

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The Independent Online

This weekend, a billionaire's dream is close to concluding in failure, yet it is arguably his own stubbornness that is preventing a happy ending.

Last year, 55-year-old South African Ivan Glasenberg listed his hugely secretive copper-to-grain trading empire, Glencore, with a single major mission in mind: bring Xstrata, a collection of South African and Australian coal assets it spun-off into a separate entity 10 years ago, back into the fold.

Some pesky Middle Eastern and Scandinavian investors in Xstrata, however, stand in the way as Glasenberg plays a high risk game of chicken.

Glencore could never have expected Xstrata to grow into the sweeping empire it has become, as chief executive Mick "The Miner" Davis bought mines the world over in an attempt to take on the likes of Rio Tinto and BHP Billiton. The Anglo-Swiss group bought Canadian nickel and copper giant Falconbridge in 2006 and also took a tilt at Anglo American, the FTSE 100 peer that was considered to have better mines.

Glencore, which in 2010 held 60 per cent of the tradeable zinc market, remained in the shadows, though kept a stake of around one-third in Xstrata just in case the young miner did indeed achieve a growth spurt. Glasenberg even sat on the board.

He was unimpressed when Davis made one of his more eye-catching raids, building a 24.9 per cent stake in platinum producer Lonmin.

Sources across the mining industry talk of Glasenberg's "hatred" of platinum – perhaps an odd-sounding emotion to have about a metal – as it cannot be traded in the same way as other commodities.

Glasenberg's scepticism was proven right, as Davis' £5bn takeover attempt in 2008 ended in failure due to the credit crunch drying up finances. Last month, union strikes in South Africa have led to dozens of men being killed by police gunfire at Lonmin's Marikana mine and there is little doubt that Glasenberg would soon offload that stake should Glencore ever takeover Xstrata.

Last year, Glencore floated in London in one of the most significant stock exchange listings since the financial crisis effectively shut the markets. The business was valued at more than $60bn (£38bn), while five senior executives, including Glasenberg, were made billionaires overnight.

Glasenberg struggled to get used to the press attention that came with the flotation, particularly over his own $10bn haul, but he was still plotting a move for Xstrata. The whole point of the flotation was to give him the currency, in the form of Glencore stock, to eventually make an all-share merger offer for Xstrata.

The move couldn't be made too soon after joining the stock exchange, as Glencore would have had to have disclosed any such transformational plans in the hefty documents that accompanied the flotation. As he waited for at least six months to go by, Glasenberg altered previously drawn-up board structure plans, which showed him at the helm of any merged entity.

To get the deal past Xstrata shareholders, he appeased them by proposing Davis to be chief executive of the new group. Bankers working for both Glencore and Xstrata moaned that most of the work on the merger was thrashed out by the two bosses behind closed doors, so that when the proposal was announced in February, their combined fee pot was at least 20 per cent down on what they would typically expect.

Glasenberg and the Xstrata board then completely misjudged the mood of the shareholder spring. The top 73 executives in the new company were offered £173m in cash just for staying on after the deal – with Davis getting nearly £30m of that.

At the Melbourne Mining Club dinner, a high-profile industry event, at Lord's cricket ground in June, Glasenberg told the 550 attendees that Davis's pay was justified as "if you want a good CEO then you're going to have to pay him".

Nevertheless, the retention payments were altered so they would only be given out in shares should certain cost-savings be made in the first two years of any merger.

There had already been grumbles from many Xstrata shareholders that the offer, 2.8 Glencore shares for every one of their own, undervalued the company's prospects.

A natural, hardened trader, Glasenberg wasn't going to raise his offer when the opposition seemed so fragmented. What he didn't count on was Qatar Holding, an indirect subsidiary of the Middle Eastern state's sovereign wealth fund, building up a stake of nearly 12 per cent in Xstrata over the summer.

As Glencore can't vote its 34 per cent stake, Qatar – and now Norway's Norges Bank, who is in agreement – holds enough shares to vote down the deal. Those parties want closer to 3.25 shares for every one of Xstrata's.

Glasenberg has already said that he's now willing to wait until another time to do the deal. One banker involved says Glasenberg could still raise his offer ahead of Thursday's vote – he is, after all, a trader who will wait until the last minute to play his hand.

More likely, Glasenberg will wait a few more years for Xstrata's price to be back in Glencore's favour for a low offer. In that time, the Xstrata board could be reconstituted, with directors pushed to leave for being willing to sell the company too cheaply for shareholders.