Glencore-Xstrata merger at risk as shareholders raise doubts

Commodities marketer and producer Glencore International has confirmed rumours that it is looking into shaking up management incentive arrangements as part of its multi-billion dollar merger with mining giant Xstrata.

In a brief statement on Wednesday, Glencore said: "In the light of the recent press speculation, Glencore confirms that it has received a proposal from the board of Xstrata in relation to certain amendments to the management incentive arrangements that were proposed in the Scheme documents. We are considering that proposal and will make a further announcement when appropriate."

It was reported yesterday that the two firms, who announced their intention to form a $65bn company in February, were considering changing proposed retention payments for Xstrata executives which have drawn the anger of investors.

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Xstrata's second biggest shareholder with a 10.4% stake, Qatar Holdings, announced in a surprise statement that while it sees "merit in a combination of the two companies, it is seeking improved merger terms". It demanded a better deal than the current '2.8 new Glencore shares for every Xstrata share'. It said an exchange ratio of 3.25 per share "would provide a more appropriate distribution of benefits of the merger."

When Glencore initially announced its merger with Xstrata, analysts at Jefferies believed that the company would have to eventually have to offer Xstrata shareholders a bit more to secure the deal. However, in light of more recent developments, the US broker said on June 12th that the original merger has a high probability of success.

Jefferies said that it base case assumption since the all-share merger of equals was announced in February was that Glencore would have to bump up its proposed merger ratio from 2.8 to 3.0 Glencore shares per Xstrata share in order to win the approval of Xstrata shareholders.

However, certain factors have reduced the pressure on Glencore to "bump", the broker said: "A recent deterioration of seaborne thermal coal fundamentals, significant earnings downgrade risk for Xstrata, geopolitical risk in Peru and Argentina, the risk to Xstrata's copper growth pipeline, the c10% stake that the Qatar Investment Authority now has in Xstrata, and Xstrata's proposed management retention awards."

Furthermore, Jefferies believes that Xstrata shareholders who oppose the merger on the current terms (and those who are against Xstrata management retention awards) have been selling Xstrata shares since the deal was announced and are likely to continue selling before a shareholder vote on July 12th.

"We would expect most Xstrata shareholders by that date to be investors who wish to own the merged Glencore Xstrata rather than investors who wish to block the deal. Our analysis indicates that the near-term downside risk to the Xstrata share price (and the Glencore share price) would be significant if the deal were to break."

BC