How big is the dowry?

Key Xstrata investors are objecting to the miner's marriage with Glencore, saying the price is too low
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The Independent Online

It was enough to take the edge off an otherwise sweet day. After seven years of courtship, the mining and commodity giants Xstrata and Glencore announced they were finally getting hitched – only for a couple of their best mates to cry foul on the nuptials.

Mick Davis and Ivan Glasenberg, the bosses of the two industry heavyweights, have already been dubbed the "married couple" after years of path-crossing characterised by huge mutual respect and the odd sparring match.

But when they formally announced their engagement, through a dream $90bn (£57bn) deal, two key Xstrata investors stood up and said they knew of good reason why the wedding shouldn't go ahead.

The naysayers are concerned that the so-called "merger of equals" – which hands Xstrata investors 2.8 Glencore shares for each Xstrata share, and gives them 45 per cent of the enlarged group – undervalues their stock. At this price, Xstrata investors would receive a 15.2 per cent premium to the closing price last Wednesday, just before news of the all-share deal leaked.

"If they continue to describe this as a merger of equals, why shouldn't Xstrata shareholders own 50 per cent of the combined company?" said Richard Buxton, head of UK equities at Schroders, one of Xstrata's biggest shareholders with 1.45 per cent.

A true 50/50 shareholder split between the two companies would imply Glencore raising its offer to about 3.1 Glencore shares for each Xstrata one, analysts said.

David Cummings, the head of equities at Standard Life Investments, Xstrata's fourth-biggest shareholder with 2.15 per cent, echoed Mr Buxton's concerns.

"Although we see some merit in the merger, the proposed exchange ratio clearly undervalues Xstrata's assets and future earnings contribution. Consequently it is our intention to vote against the deal unless merger terms for Xstrata shareholders are materially improved," he said.

Although Schroders and Standard Life together control only 3.6 per cent of Xstrata's shares, their opposition will be worrying to Messrs Davis and Glasenberg for three reasons. First, they don't mince their words. Second, they are likely to represent only the tip of the iceberg of Xstrata shareholder discontent. We don't know how big the iceberg is, but reports suggest half of Xstrata's top 10 shareholders are angry that it has failed to engage with them on the terms of the deal and want a decent premium to compensate for the fact that its assets are "higher quality" than Glencore's.

And third, relatively little shareholder opposition is needed to scupper the deal. This is because Xstrata and Glencore have opted to implement the merger using a scheme of arrangement, which requires agreement from 75 per cent of shareholders – as opposed to a typical offer procedure, which needs only 50 per cent. Furthermore, Glencore already owns 34 per cent of Xstrata and will be unable to vote its holding on the deal. As a result, only 16.4 per cent of Xstrata's shareholders need to vote against the deal to block it.

Xstrata's Mr Davis put a brave face on the chances of the deal succeeding yesterday, saying: "We clearly now have to go to our shareholders and speak to them and take them through the transaction... We've got a long gestation period, we recognise that." He said the merger would "create a unique animal able to capture value right across the spectrum".

Analysts seem divided on whether Xstrata and Glencore will be able to get their deal past shareholders at yesterday's agreed price or whether they will have to sweeten it.

Pointing to Xstrata's substantial mining operations, Charles Stanley analyst Tom Gidley-Kitchin said: "Xstrata comes with a dowry because it can push its product through Glencore. Nearly all the synergies come from Xstrata, which is an argument for some sort of a premium.

"It's possible Glencore will sweeten the deal with a small element of cash or by increasing the ratio to 2.9 or 3," he said, adding that the transaction could conceivably go through at the current level.

With Xstrata's shares down 4.5 per cent and Glencore's by 3.8 per cent, the market seems to think that Xstrata risks selling itself short and that Glencore may have to raise its price or walk away.

First among equals

Mick "The Miner" Davis and Ivan Glasenberg were in good form yesterday as they outlined plans to merge their companies.

Radiating charm and amiability, the South Africans answered The Independent's questions with good humour, at odds with their reputations for being intense, competitive and egotistical. But their humour may be tested in coming months, as Mr Glasenberg gets used to sitting on the deputy's stool.

Asked if being demoted to second fiddle might be a problem, the Glencore boss was emphatic that "it's not a big issue", explaining that Mr Davis would look after the mining side ofthings and he wouldrun commodities.

Still, Mr Davis will be the boss, while Mr Glasenberg, who will be the enlarged group's biggest shareholder with about 7 per cent, won't.

"It is not a matter of who's working for who. Mick is CEO but we work together. Mick will lead it well," he said. It will be interesting to see how it pans out.