June 27, 2012 / 6:23 AM / 7 years ago

Glencore expected to sweeten terms to win Xstrata

LONDON, June 27 (Reuters) - Commodities trader Glencore , scrambling to save its $30 billion offer for miner Xstrata, is expected to sweeten its bid in order to seal the deal, after key shareholder Qatar said it could oppose the takeover on current terms.

Qatar, which remained silent on its intentions for months as it built the second-largest stake in Xstrata, said in a surprise statement on Tuesday that it supported the principle of the deal but demanded an improvement in terms from 2.8 new Glencore shares for every Xstrata share to 3.25.

Glencore, which made its long-awaited move for Xstrata in February, had been expected to improve the terms of its all-share deal in the early days after the offer was announced.

But those hopes faded in the months that followed as Glencore, already Xstrata’s largest shareholder, with almost 34 percent, stuck to its guns, as target Xstrata faced falling thermal coal prices and increased uncertainty over Argentina and Peru - key to its growth prospects.

On Tuesday, before Qatar’s unexpected announcement, Xstrata shares were trading around a 2.6 ratio, implying the market was not expecting a change to terms.

Analysts said the unexpected intervention from Qatar meant a change in Glencore’s terms - combined with changes to retention packages for Xstrata bosses that have angered investors - was now virtually inevitable to rescue the deal to create an integrated mining and trading powerhouse.

But they said it was not clear Glencore would raise its bid as high as 3.25 - at the high end of initial expectations and a level at which some say the deal could destroy value for Glencore.

“We believe a bump - probably from 2.8 to 3.0 Glencore shares per Xstrata share - may be necessary to win over (Qatar) and other Xstrata shareholders,” Jefferies analysts said in a note. “However, we do not believe Glencore will bump to a ratio of 3.25 times.”

Analysts said failure to secure the deal would not only cause a short-term drop in Xstrata shares, currently trading at a premium to the sector, but would also prove damaging for Glencore, whose bosses have long traded on their reputation as dealmakers.

It would also, though, prove potentially damaging for Qatar, which has invested more than $4 billion to become Xstrata’s largest minority shareholder.


Several sources close to the deal said on Tuesday that Qatar’s demand for 3.25 was likely a negotiating position, part of a strategy that included Tuesday’s unexpectedly public statement.

“In our view, the news about Qatar requesting a bump and the recent strong shareholder opposition to the Xstrata management retention awards are problems. But ... these are likely not insurmountable hurdles to the proposed Glencore Xstrata merger,” Jefferies said. “A bump from Glencore and a revision to the management retention awards should be the logical next steps. We continue to expect this proposed merger to happen.”

Glencore and Xstrata have until Thursday to alter the terms of the deal without having to change the dates of shareholder votes, set for mid July.

Glencore and Xstrata have declined to comment on the Qatari announcement.

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