Glencore, Xstrata Deal Unraveling

When the proposed $90 billion merger between Glencore International and Xstrata was first announced, the seeds of its failure were first planted. Glencore already owned 34% of Xstrata and could not vote those shares in the decision on the merger. All it takes is about one-sixth (16.5%) of Xstrata’s shares to be voted against the deal and that’s the end of that.

The deal, now figured to be worth just(!) $70 billion, is at the mercy of two sovereign wealth funds, both of which want a better offer. The first to make a move was Qatar Holding, which holds a 12% stake in Xstrata. Now Norway’s sovereign wealth fund has acquired a 2.97% stake in Xstrata. Neither Qatar Holding nor Norges Bank Investment Management supports the Glencore offer for Xstrata.

Glencore’s offer is for 2.8 shares of Glencore stock for each share of Xstrata. The Qataris want 3.25 shares of Glencore for each Xstrata share. Glencore’s CEO has said the original offer stands:

If it does not happen — no big deal. It is not the only deal that can be done.

He was right about that. Glencore paid $6.2 billion for Canadian grain-handling firm Viterra in March.

Huge, game-changing deals in mining are hard to pull off. BHP Billiton PLC (NYSE: BHP) failed in an attempted $140 billion acquisition of Rio Tinto PLC (NYSE: RIO) and failed a second time in a $39 billion offer for Potash Corp. of Saskatchewan (NYSE: POT). To mining companies, mergers and acquisitions are like losing — big egos can’t stand the shame of being acquired.

Both Glencore and Xstrata management support the deal. And why not? The Xstrata team stands to split a retention bonus of about $274 million if the deal goes through. If Glencore walks away before the deal goes to a shareholder vote, the company will pay a breakup fee of about $475 million. That’s right, Xstrata does not pay the breakup fee, Glencore does. Go figure.

If the deal with Xstrata fails, it will have cost shareholders $475 million. Glencore’s management team will still own 83% of the company and is unlikely to be kicked out or otherwise censured. Just another bad hair day in the mining business.

Paul Ausick