Glencore and Xstratas Merger Delayed over the Price - Coursework Example

Glencore and Xstrata’s Merger Delayed over the Price Introduction The all-share merger between the commodities trader, Glencore International plc (Glencore) and mining group, Xstrata plc aims at creating a powerhouse in the industrial and mining sector. It is under the Companies Act 2006, part 26 (the “merger”). Glencore is a premier commodities marketer while Xstrata is a world-class metal and mining assets operator. Glencore gives the following explanations as the major reasons for the merger It is the logical step that transforms both businesses into a natural resources superior major: This is because both businesses’ track record of value and growth has been proven over time. For instance, Xstrata equity value at its creation in 2001 was $500 million. It has grown that value to about $59 by February 2012. Similarly, Glencore’s equity value was $1.2 billion when it underwent management buy-out in 1994. It has grown it to $50 billion by February 2012. A unique business model integrated along the value chain to capture value in an evolving competitive landscape: Glencore is the world commodities’ trader and marketer while Xstrata has an established industrial mining and metal assets. The combination of these two will ensure value in every stage in the commodities. The merger is positioned to respond to changing industry dynamics To maximize effectiveness through governance: The new governance and management is expected to remain intact for two years after the merger is effected. (Glencore 2012, online) The Merger Process The merger is to be affected through a scheme of arrangement by Xstrata that will have to be sanctioned by a court under part 26 of the UK companies Act. This will result to Glencore acquiring the entire Xstrata’s ordinary share capital (issued and to be issued). The Scheme document together with the Forms of Proxy contains the conditions and full terms of the merger plus details of how to vote. Xstrata prepared the scheme of arrangement and distributed it to its shareholders. Glencore prepared a circular and distributed it to its shareholders. This merger process has gone through the process of coming up with the idea and acquisition justification. It is yet to get to the integration and results phases. It has only undergone the pre-combination stages and it starting the combination stage. With the EU approval it is ready to move to the post combination stages The merger process started in 2011 through the initiative of the CEO of Glencore Ivan Glasenberg and the CEO of Xstrata, Mark Davis. However it did not become public knowledge until February 2012. On 7 February 2012, the recommended All-Share Merger between Glencore and Xstrata was announced. Later the timing update was given on 13 April 2012. On 31 May 2012, Glencore announced the publication of documents that were needed for the merger. The supplementary prospectus was issued on 12 July 2012. Glencore’s prospectus and circular to be sent to Glencore shareholders was approved by the UK Listing Authority on 31 May 2012. In June 2012, the turn of events changed when Qatar Holding said it will not support the deal unless additional shares were added. This resulted to Glencore revising the deal and issuing a second proposal. Glencore made the second proposal increasing the merger ratio 3.05 shares for each Xstrata share. Although Mick Davis would have become the CEO of the combined group for at least three years, the new proposal provided that he would step down within six months after which Ivan Glasenberg would take over. The revising of the deal delayed the process as Xstrata shareholders needed more time to consider the deal. This was followed by the voting process. On 20 November 2012, Xstrata shareholders approved the merger pending the resolution of the management incentive arrangement. On 22 November 2012, the European Union recommended the all-share merger of equals under the EU Merger Regulations. The European Union competition Authority conditionally approved the deal. The Union said that this deal could only proceed as long as the combined company will cancel a deal to sell Zinc to Nyrstar, “the world’s Zinc producer and also sell its stake in the Belgian Company” (Wall Street Journal 2012, Online) The completion of the merger is conditional awaiting approvals of South Africa and China and the completion of the court process. Brief about Glencore and Xstrata Glencore Glencore is a producer and marketer of commodities. It markets minerals and metals, agricultural products and energy products. It is involved in the “production, refinement, processing, storage and transport of these products” (Glencore 2012, p. 14). Glencore is involved in distributing commodities that it produces plus those that is outsources to industrial consumers. The operations in Glencore have three segments; Metals and Minerals, Agricultural products and energy products. Each segment is responsible for managing all the activities that are involved. The company’s shares are traded in the London and Hong Kong stock exchanges. Xstrata Xstrata is ranked as the fifth largest mining group. It has “top five industry positions in copper, export thermal coal, export cooking coal, ferrochrome, zinc and nickel, meaningful positions in vanadium and additional exposure to gold, cobalt, lead and silver” Glencore 2012, p. 15). XStrata has five principle business units: Xstrata copper, Xstrata Coal, Xstrata Nickel, Xstrata Zinc and Xstrata Alloys. It is listed on the London Stock Exchange and six Swiss Exchanges. The company has operations in over 20 companies which include; China, South Africa, United Kingdom, United States, Argentina, Canada among others. Main Reasons for Merger Delay Some of the main reasons identified for the merger delay include: 1. Qatar Holding demand In June 2012, the merger process hit a stand still after Qatar Holding, Xstrata’s second biggest investor made a demand that the deal be improved (Thomson Reuters 2012). Qatar Holding which owns 12 per cent of Xstrata, Knight Vinke and Sovereign wealth fund of Norway opposed the deal. In response to this, Glencore revised the proposal; Xstrata share holders would be entitled to get 3.05 shares for in each Xstrata share held. This is an improvement from the previous 2.8 shares that was in the initial proposal. However, in the new proposal, Glencore’s Chief executive, Ivan Glasenberg would be the head of the merged business. A news release by Xstrata, says that both companies requested an extension to the deadline of shareholder voting. This is to allow Xstrata directors to consider the revised merger proposal. 2. Mick Davis’ Departure The original deal had provided that Mick Davis, Xstrata’s would stay for at least three years. In the new deal, Davis is to leave within six months. The £29 million package for Mick Davis that was in the previous proposal would no longer be part of the deal. In the words of the director, “The exchange ratio was significantly lower than would be expected in a takeover.” (Thomson Reuters 2012, p. 4) The director warned on the risk involved if Davis would be replaced by Ivy and also if the management incentive arrangements were not adhered. The investors had concerns over Ivan Glasenberg’s bid to install himself as the chief executive of the combined company. Basically Mr. Davis departure and the retention package were the main reasons for the delay. 3. Xstrata Staff retention package The original Glencore deal offered $274 Million retention package for 73 of Xstrata’s top managers which would be paid over a period of two years. The reason for the delay was that Xstrata sought more time “to address shareholder concerns about governance and strategy of the combined company” (Sakoui et al, 2012). The ‘Mining” reports that people close to the talks confirmed that Glencore’s shareholders opposed the retention payments which were intended to retain Xstrata’s senior managers after the merger. The shareholders need assurance given that Xstrata’s assets will be contributing a big portion of the earnings of the combined company. 4. Regulation The European Commission (EU) has had concerns since the interests of the merger seemed to concentrate on Europe. According to Jamasmie of mining.com, The EU announce on 31 October 2012 that it would delay the deadline to give its verdict on the merger after Glencore promised to look into its concerns (Mining.com 2012). Over the years, large deals and mega-mergers have failed to materialize in the mining sector. The main reasons for this are regulatory and political issues. Should it go through, the merger between Glencore and Xstrata would be the second biggest in the sector. Glencore and Xstrata relative positions within the merger The merger is an all-share merger of equals of Glencore and Xstrata to create a $90 billion major natural resource. According to a press release from Glencore, dated 7 February 2012, the natural resource group is to have “a combined equity market value of $90 billion and a unique business model, fully integrated along the commodities value chain, from mining and processing, storage, freight and logistics, to marketing and sales” (Glencore 2012, 1). The first deal included a merger ratio of 2.8 shares for every Xstrata share held, excluding the shares Glencore group owns in Xstrata. That means the Xstrata shareholders other than Glencore were to have 45 per cent stake in the combined company. Each Xstrata share is valued at 1, 290.10 pence and the entire capital (issued and to be issued) at approximately £39.1 billion. The CEO of the combined group was to be Mick Davis, Xstrata’s current CEO and Ivan Glasenberg, who is the current Glencore CEO, would be the deputy CEO of the combined group. The current Xstrata CFO, Trevor Reid would be the CFO of the Combined company while the Deputy CFO would be Steven Kalmin who is currently Glencore’s CFO (Glencore, 2012). In addition, Sir John Bond, Xstrata’s current non-executive chairman would be the non-executive chairman of the merged group. The board of the combined group will include Ivan Glasenberg and Mick Davis and eight non-executive directors; four from Glencore’s current board and four from Xstrata’s current board. However, recently, Sir James Bond tendered his resignation and his replacement has not been named. Glencore was willing to relegate the major governance positions in order to create an equitable management. According to Cimilluca of “The Wall Street Journal”, Xstrata mining assets will account for the combined group’s profits (Wall Street Journal 2012). This means that allowing the top Xstrata’s management meant a rise in profits since the pool included top managers from both companies. This was in place with the shares at 2.8 shares for every Xstrata share. When Qatar Holding made it demands and Glencore improved the number of shared to 3.05, the top management position was changed. Mick Davis is to exit after six months which means his payment package ceases to be part of the deal. The staff retention package has been rejected and this could mean the managers could exit after the deal goes through. According to Business Day Live, says that the companied belong together. They are linked through Glencore ownership of 34 per cent of Xstrata and Xstrata was founded partly out of Glencore. Revenue and profitability of the two companies differ in a big way. Business Daily live says that “Glencore’s revenue is five times that of Strata, while Xstrata’s Earnings before interest, taxes, depreciation and amortization are three times Glencore’s” (Business Daily Live 2012, Online). Glencore recasting the merger from a merger of equals to a takeover at a higher premium could means Glencore already owns 34 percent of the stakes in Xstrata. It is responsible for trading a third of the mining assets in Xstrata. “The Telegraph” reporters observe that “the 17 pc premium attached to the revised potential offer is below the average 20 pc to 30 pc takeover premium UK Listed companies” (The Telegraph 2012, Online). The deal is fair, this is because currently an Xstrata share is valued at 2.66 which in turn imply a 14pc premium. Any increase in the premium might leave Glencore out of control. Global Mergers and Acquisitions activities since 2001 Most merger and acquisition (M&A) activity is mostly restricted to the UK and the U.S. The Investment News confirms this assertion. It says that the UK and the US are the top destinations for most international M&A. Other destinations include China, Italy and France (Investment News, 2011). The process of coming up with a decision that will lead up to merger is linked to stock market performance. Global M&A experienced great waves just about the turn of the century. This ended in 2001 and was followed by stable M&A activity for at least 2 years. Since 3003, the number has been rising steadily. The number of M&As increased in 2004. According to the DG ECFIN (2007), “The number of recorded deals increased from about 34,500 in 2005 to nearly 39, 000 in 2006 … the aggregate value of deals rose from €2,435 billion to €3,082 billion” (p.2). Financier Worldwide says that historic levels in M&A were realized in 2007 with a deal volume of $4.83 trillion which increased by 23 per cent from $3.91 trillion announced in 2006. The recent trends have seen a big target of the Brazil-Russia-India-China countries which represent 25 per cent of GDP and 60 per cent of global growth. Top mergers have taken place in the finance, oil and gas, healthcare and Mining and energy sectors. The mining and utilities sector had M&A deals with the highest total value - $557.1 billion which accounted for 25.6 per cent of the global deals in 2011 (Mergermarket 2012). 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Volume 380 475 475 596 564 701 903 919 1,047 1,123 1,008 Value $M 66,745 56,347 46,182 26,350 65,430 175,713 210,848 126,884 60,035 113,706 162,439 The table below shows the value of deals from 2001 to 2011 in the mining and metals, from the study (Dowham et al, 2012) Most successful Mergers & Acquisitions since 2001 In measuring the success of M&A most observers look at shareholder returns. Sisco of “The tech Republic says, “acquiring another company is a strategic initiative to gain something – whether it is to gain market share, acquire new technology or consolidate an industry” (The Republic 2002, Online). Such mergers have exploited synergies, protected markets by eliminating rivals and have gotten footholds in other countries and continents. Some of the most notable M&A can be classified in five sectors; Finance, Telecommunications, energy, pharmaceuticals and products. The table below names a few of the M&A which have made a great impact in the economies that host them. Year Acquirer Acquired Amount In Billion U.S $ 2001 Glaxo Wellcome Smithkline Beecham 78.7 2001 American Online Time Warner 181.6 2002 Bell Atlantic GTE corporation 71.3 2002 Comcast Corporation AT&T Broadband 72.0 2005 Royal Dutch Petrol Shell Trans. &Trade 80.3 2006 AT&T Inc BellSouth Corp 89.4 2007 Shareholders Kraft foods Inc 61.6 2007 RFS Holdings ABN AMRO Holdings 98.2 2008 Shareholders Philip Morris Intl. 113.0 2008 Gaz De France Suez 75.2 2009 U.S. Treasury Department GM Certain Assets 61.2 Conclusion Glencore and Xstrata have come a long way in creating this deal that will result in a powerhouse. Glencore’s press release dated 7 February 2012, said that the combined group will take on the name ‘Glencore Xstrata International plc, to be listed on the Hong Kong and London stock Exchanges. The group’s headquarters will be in Switzerland. Having been approved by the EU, it now awaits References Cimilluca, D. 2012, Glencore Deal Hinges on Pay, The Wall Street Journal: September 27, 2012. Available at: http://online.wsj.com/article/SB10000872396390443507204578022494225895664.html Ebrahimi, H., Power, H. And Rowley, E. 2012, Glencore and Xstrata Merger Descends into Acrimony, The Telegraph: 28 November, 2012. DG ECFIN 2007, Mergers and Acquisitions Note, European Commission, Issue No. 4. Available at: Downham, L., Elliot, M., Lynch-Bell, M., Murphy, P., Crabtree, N., Johns, N. and Colborne E. 2012, Mergers, Acquisitions and Capital Raising in Mining and Metals 2011 trends: 2012 outlook. http://www.ey.com/Publication/vwLUAssets/Mergers_acquisitions_and_capital_raising_in_mining_and_metals_-_2011_trends_2012_outlook Gestrin, M. 2011, International Mergers and Acquisitions Surge in 2011, Investment News: Issue 16. Available at: Glencore International plc 2012, News Release: Merger Update – EU Merger Control Clearance, 22 November 2012. Available at: http://www.glencore.com/ News Release: Merger-Update – Glencore’s Proposal to Xstrata: 10 September 2012. Available on Jamasmie, C. 2012, EU Delays Glencore – Xstrata Merger Verdict, Mining.com: October 31, 2012. Available at: Merger markets 2012, Press Release: Mergermarket M&A Round-up for Year End 2011: January 3 2012. Available at; http://www.mergermarket.com/pdf/Press-Release-for-Financial-Advisers-Year-End-2011.pdf Mock, V. and Miller, J. 2012, EU Approves Glencore – Xstrata Merger, Wall Street Journal: November 22, 2012. Available at: Thomson Reuters 2012, Inside Metals: September 14, 2012. Available at Sakoui, A., Blas, J. And Thomas, H. 2012, Xstrata Delays Merger with Glencore, Mining: September 22, 2012. Sisco, M. 2002, Measuring the Results of an Acquisition, Tech Republic: December 23, 2002. Available at: http://www.techrepublic.com/article/measuring-the-results-of-an-acquisition/1060337 Xstrata International plc 2012, News release: Extension to merger timetable, 21 September 2012. Available at: < http://www.xstrata.com/restricted/glencorexstrata/> Read More