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Xstrata rebels with a just cause

Deal will not proceed if 16.5% of Xstrata’s aggrieved investors don’t agree as the pass-mark is 75% and Glencore can’t vote

The rebels in Xstrata’s ranks are right to be angry: the terms of the offer from Glencore are miserable. As matters stand, Sir John Bond and Mick Davis, chairman and chief executive of Xstrata, have granted Glencore’s Ivan Glasenberg greatest wish and extracted too little in return.

A ratio of 2.8 Glencore shares for every Xstrata share equates to a takeover premium of 8% using the two companies’ valuations on the day before last week’s leak of the talks. The would-be partners prefer an apples-and-pears calculation that produces a 15% figure – but the commonsense number is 8%. It’s also sensible to ignore the hype about a “merger of equals.” Glencore is offering to buy Xstrata: that’s a takeover, even if Bond and Davis would keep their job titles on completion.

In normal circumstances, an 8% takeover premium would be laughed out of court as plain cheeky. Davis is asking investors to accept the terms because, he argues, the combined company will be greater than the sum of the parts and because he’s negotiating in “the universe of the possible.”

Well, okay, Glenstrata may bag an extra 0m-a-year by shoving more of Xstrata’s output through Glencore’s trading division. And, yes, there must be a point at which Glencore’s shareholders, who own 34% of Xstrata, would protest if they were asked to surrender more of the pie. But, come on, those happy arguments have to be set against three hard facts.

First, not all Xstrata shareholders are fans of Glencore paper. Second, the deal will not happen if 16.5% of Xstrata’s don’t approve as the overall pass-mark is 75% and Glencore can’t vote its stake. Third, Glencore has been a quoted company for only eight months, so it’s still extremely early to claim they have a proper feel for the real value of its acquisition currency, its shares.

That third point is critical. Glencore was floated at 530p last May and has never traded at that price since; it went as low as 350p last autumn. The great investment debate about Glencore – whether profits from trading commodities should be valued as highly as profits from mining – has not been settled.

Sceptical Xstrata shareholders may instinctively think it’s safer to own a pure miner that digs stuff out of the ground. BHP Billiton, for one, is busy trying to force greater transparency into the pricing of commodities, meaning the glory days of mega-profits from trading commodities may be over. The game will always be wonderfully lucrative for Glencore’s practitioners, but perhaps less so for the providers of capital.

It remains to be seen if Standard Life and Schroders can round up an army of fellow objectors within Xstrata and thus force Glencore to improve its offer. But let’s hope they force a full debate. As Richard Buxton at Schroders says, it’s easy to see how Glencore shareholders and Xstrata’s management benefit, but it’s hard to see what’s in it for Xstrata shareholders. Bond, author of HSBC’s toxic Household acquisition in 2003, should be made to earn his corn this time.

Let’s hope, too, that the regulators put the deal under the microscope. Glenstrata will not be the biggest beast in the mining jungle (BHP, Rio Tinto and Vale, of Brazil will still be bigger) but perhaps its arrival would radically alter the bio-diversity. The world has never seen a big, integrated player of this size. The combo boasts it will operate across “mining and processing, storage, freight and logistics, to marketing and sales.” And it would have 30% of thermal coal market and 25% of global zinc market. That’s power. Who benefits?

The case for the defence is that the European Union and regulators elsewhere have always treated Glencore and Xstrata as one company, and thus nothing substantial has changed. The case for the prosecution is that when companies talk about “capturing more of the value chain” what they really mean is that they sniff an opportunity to make the customer pay more. The ultimate customer in this case is not only China; it’s everyone. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds