Fierce statement out of Xstrata on Friday afternoon…
The Independent Directors of Xstrata plc have today written to Glencore International plc to request clarification of the outline proposal (the “Proposal”) provided to the Xstrata Board immediately prior to the Xstrata Court Meeting and New Xstrata General Meeting today in Switzerland.
The Proposal lacks sufficient information on key elements. On receipt of a detailed proposal the Board will carefully consider its merits and in particular whether it would represent a takeover of Xstrata by Glencore.
The Independent Directors note:
· The proposed exchange ratio of 3.05 represents a premium of 17.6% to the undisturbed Xstrata share price on 1 February 2012 and 22.2% to the closing price on 6 September, which is significantly lower than would be expected in a takeover
· The Proposal contains as a condition the ability for Glencore at their sole discretion to structure the transaction as a takeover offer in contrast to the current recommended scheme of arrangements where that discretion currently lies with Xstrata
· The intention to replace Mick Davis as CEO and to amend the management incentive arrangements represents significant risk around the retention of the Xstrata senior and operational management intended to be responsible for approximately 80% of the combined group’s earnings and represents a fundamental change to the governance structure which underpinned the agreed merger of equals announced on 7 February 2012.
On receipt of a detailed proposal, the Independent Directors will consult with shareholders and consider whether to reconvene the shareholder meetings and recommend what action shareholders should take.
The backstory is here. This is the Xstrata response – following the divine intervention of Mr Tony Blair – to the last minute improvement in Glencore’s share swap terms for Xstrata from 2.8 times to 3.05 times, and which was accompanied by the barbed requirement that Glencore’s Ivan Glasenberg run the enlarged mining/trading show, rather than Xstrata’s Mick Davis.
The blood has turned seriously bad here. Putrid in fact.
The Glencore camp seem to have taken the view that they couldn’t sweeten the offer and afford Mick’s retention package, and anyway since this was becoming an outright takeover, rather than a merger, why shouldn’t the acquirer have full management control?
The Xstrata camp, meanwhile, are accusing Glasenberg of running a “black ops” strategy, with the Glencore boss “now showing his true colours.”
Oh, and the Qataris are furious as well, claiming they didn’t know of Glasenberg’s plan to become chief executive. (There’s some good background on Blair’s links with Sheikh Jassim bin Hamad, the prime minister of Qatar here, by the FT’s law courts correspondent Jane Croft.)
But setting personal animosities aside, there are at least a couple of very serious points in the Xstrata response.
For a start, were the independent directors to now agree to a switch from the planned scheme of arrangement (requiring 75 per cent support) to a simple majority vote takeover, they would in effect be consciously disenfranchising a large block of minority shareholders. And that’s not very British.
There’s also the matter of retaining senior Xstrata management other than Davis. Whatever the view on the previous bonus proposals (and we were not impressed), the fact is Xstrata has maybe 15 sizeable new mining projects going live over the next 18 months or so.
Those need managing. Disruption destroys value. Lots of it.
With Xstrata stock trading at 2.7 times Glencore paper at pixel time (compared with 2.8 times before the Xstrata statement), the markets are not yet declaring this deal to be dead. But the two bankers who were instrumental in putting this deal together in the first place — Michael Klein, formerly of Citigroup, and Ian Hannam, formerly of JP Morgan — really do have their work cut out here.
As one market source put it:
Basically, you’ve got advisors brought in to complete a marriage after a 10-year engagement. They end up in the middle of an acrimonious divorce. It’s stunning.
Glenstrata coverage — FT Alphaville