Shareholder revolt greets Glencore Xstrata marriage plans

The merger of Glencore International (GLEN) and Xstrata (XTA) was dealt a blow from the outset on Tuesday as shareholders rebelled against the terms of the £57 billion deal.

The commodities giants' tie-up had been billed by the companies as a "merger of equals" but logistically sees Glencore bid for the 66% of Xstrata that it does not already own.

Xstrata shareholders will be offered 2.8 Glencore shares for every Xstrata held with the deal valuing each Xstrata share at 1290.1p, giving the entire issued share capital a £39.1 billion price tag.

Although the offer terms represent a 15% premium on Xstrata's share price, which stood at 1119.50p on 1 February, the last trading day before the official announcement of merger talks, the news has been met with resistance from two of Xstrata's institutional shareholders.

Shareholder revolt

Standard Life (SL.), which holds 63.6 million shares - a 1.92% interest - in Xstrata, said it will oppose the merger on the terms proposed by the mining group's chief executive Mick Davis and Glencore.

"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," said David Cumming, head of equities at the fund manager.

"Consequently it is our intention to vote against the deal unless the merger terms for Xstrata shareholders are materially improved."

Schroders (SDR) also plans to vote the deal down. Its head of equties, Richard Buxton, said: "This is not acceptable. It is not compelling or attractive for Xstrata shareholders and we will vote against. If they keep describing it as a merger of equals, why don't Xstrata shareholders get 50%?" he asked.

"We continue to think Xstrata's assets and growth profile are superior to Glencore. We had an opportunity to purchase Glencore shares at flotation and chose not to. That was the right decision," added Buxton.

The deal needs 75% approval from Xstrata shareholders - excluding Glencore - to go ahead. This means that shareholders with 16.5% of the company could blitz the merger. There are also the usual regulatory hurdles to be overcome.

Nuts and bolts

Rebellion aside, details of the proposed marriage include a new name - the rather unimaginative Glencore Xstrata International.

It will be led by Xstrata boss Mick Davis while Glencore's chief Ivan Glasenberg will serve as his deputy chief executive and president.

With such big personalities at the helm, the role of chairman will be crucial. This will be taken by business legend Sir John Bond, who has previously chaired Vodafone (VOD) and HSBC (HSBA).

Xstrata staff will also take on other top roles, with Trevor Reid heading for the finance director's chair with Glencore's current finance boss Steven Kalmin as his deputy.

The top 12 member of the senior team at Glencore are expected to remain major shareholders.

The new company will have combined revenues of more than $200 billion (£126.5 billion) and have a firm place as global leader in export thermal coal, ferrochrome and integrated zinc production. It will be the third-largest producer of copper, growing into the largest independent producer within four years, and fourth-largest producer of nickel.

Despite listing in London, the merged entity will be headquartered in Switzerland and incorporated in Jersey for tax reasons. Operations will cover around 101 mines in 33 countries with total staff numbering 130,000.

"Our industry landscape is evolving ever faster. Sources of supply are diverging from traditional mining regions to more complex and disparate locations, with a range of new industry participants seeking access to markets," said Davis in a statement.

"At the same time, demand growth has shifted from Europe, Japan and the US, to emerging Asian economies. The commodities value chain is becoming longer and more complex, creating opportunities for a company that can pre-emptively participate at every stage. Glencore Xstrata would be well positioned to do just that, creating value from resource extraction to customer sales and services, at a time when demand for our combined products continues to grow."

For an understanding of what to look for when considering exposure to the sector, read: Analysing... Miners.