An Overview of the GlencoreXstrata Merger - The Student Lawyer

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You are here: Home Articles Commercial & Finance An Overview of the GlencoreXstrata Merger

An Overview of the GlencoreXstrata

Merger
Commercial & Finance February 14, 2013 0 Georgi Korchev

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you that it is important to improve your commercial awareness. Well, you have come to the right
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familiarising yourself with the biggest corporate transaction of the last year.
In February 2012, Glencore announced its intention to buy Xstrata for 56.8bn in shares. This is
considered by the press to be the biggest mining takeover ever, creating an entity with combined
US$209bn in sales in 2012. In what was supposed to be an all-share merger of equals, Glencore
offered 2.8 of its shares for each Xstrata share.
Glencore, which has its headquarters in Switzerland, is the worlds largest commodities trader. It
was founded by Marc Rich (who was convicted of tax evasion, but later pardoned by Bill Clinton).
Glencore is a dominator in the internationally tradeable zinc and copper markets, holding global
market shares of 60 per cent and 50 per cent respectively in 2010. It also has a market share of 9
per cent in the internationally tradeable grain market and 3 per cent in the internationally
tradeable oil market.

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Xstrata, also headquartered in Switzerland, is the fourth largest mining company globally. It is a

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leading producer of coal, copper, nickel and zinc. It is a member of the FTSE 100 index with a total

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of 29bn market capitalisation on the London Stock Exchange.

Preparation is key
Even before the announcement of the takeover, Glencore had built a solid stake in Xstrata. It was
its largest shareholder at 34 per cent. Glencore leaders Willy Strothotte and Ivan Glasenberg have
been on the board of Xstrata since 2006. Furthermore, Glencore was instrumental in the
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An Overview of the GlencoreXstrata Merger - The Student Lawyer

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Crime

appointment of the current CEO of Xstrata, Mick Davis.

Thus, it is very much clear that Glencore had been envisioning a takeover of Xstrata for a long
time. This is one of the main reasons why Glencore made an initial public offering on the LSE in

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May 2011. If you dont know what an Initial Public Offering is, have a look here or here. Glencore

Dismissed Deterrent
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floated a 20 per cent stake valued at 6.24bn. This was the largest capital raising by an overseas
company on the LSE. Glencore became the fifth largest mining related company on the London

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bourse (valued at approximately 36.7bn) and a member of the FTSE 100 index. Linklaters and

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Norton Rose advised Glencore on the deal, whilst Clifford Chance advised the underwriting
banks.
In the first week of the IPO, trading was only open to institutional investors. The company also

BRIEFINGS

intended to reward long-serving employees for their loyalty by providing them with share
incentives.

Lucrative deal
A merger of this scale requires the best advisors. Both companies were advised by two top tier
corporate practices Linklaters for Glencore and Freshfields Bruckhaus Deringer for Xstrata. King
& Wood Mallesons was advising the two companies in Australia, whilst Werksmans was advising

Morning Headlines 13/1/2015

them in South Africa. By way of reminder, the new version of the Takeover Code, enacted in

January 13, 2015

September 2011, requires UK-listed companies to declare their advisory expenses for legal,
financial and PR services. It was thus disclosed that Glencores estimated legal fees amounted to
12.2m, whilst Xstratas legal fees were approximately 13m.

Boardroom politics
There were two main issues surrounding the merger. The first one was how much the executives
should be paid. The initial retention package constituted 170m to be divided between 73 key
executives. This was severely opposed by shareholders. As such, in June 2012 both companies
began the process of amending the proposed retention package.

A deal of this kind is

The second issue was the takeover price. Glencore initially

inevitably going to draw

offered 2.8 of its shares for every Xstrata share. These two

attention from the

European Commission
and other global
competition authorities.

issues were supposed to be resolved at a meeting on 12 July

2012. Qatar Holding, which is the second largest shareholder in
Xstrata, issued a formal statement proclaiming that whilst it
supported the merger between the two companies, it will vote
against the 2.8 offer. At this point, Qatar Holding had built a
stake of more than 12 per cent in Xstrata, which gave it the
potential to block the deal singlehandedly. The Middle Eastern
investment fund was looking for an increase of the offer to 3.25
shares. Another major shareholder, Norges Bank Investment
Management, was also planning to vote against the offer. In
the meantime, Glencore CEO Ivan Glasenberg had called the
Xstrata shareholders bluff by claiming that he was not worried
whether the deal completed immediately or not.

It must be noted that Glencores bid was actually recommended by the board of Xstrata to its
shareholders. According to the Takeover Code, the board was obliged to retain its

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An Overview of the GlencoreXstrata Merger - The Student Lawyer

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recommendation except in the unlikely circumstances of receiving a competing bid or a material

change in Glencores circumstances.
It was subsequently announced that the meeting scheduled for 12 July 2012 had been adjourned
to 7 September 2012. Three days later, Glencores management finally budged, making a revised
offer of 3.05 shares and reducing the retention package to 140m. In response to the concerns
raised regarding the proposed management structure, it was agreed that Mr Davis would
become Chief Executive for six months before being replaced by Mr Glasenberg. Davis would
then step down from the board, with another Xstrata executive taking his place in order to
preserve the majority of Xstrata directors on the board. Moreover, the board amended the voting
structure to allow shareholders to reject the retention package without undermining the deal.
Two of Xstratas large shareholders, Knight Vinke Asset Management and Threadneedle
Investments, criticised Xstratas board for recommending the deal. They questioned the
independence of the Xstrata board as it failed to capitalise on Xstratas superior bargaining
power. On 15 November, Qatar Holding announced that it would vote in favour of the merger.
Finally, on 20 November both Glencore and Xstrata shareholders voted in favour of the deal.

Global deal
Whenever you hear that a world leading trader of particular commodities is merging with a
leading producer of the same commodities there will always be some people who will think that
this is a bad idea. These people are called competition regulators. A deal of this kind is inevitably
going to draw attention from the European Commission and other global competition
authorities. Particularly in response to the concerns of the EU Commission, Glencore offered to
sell some of its zinc assets. Nevertheless, there was still risk that the deal would be disapproved
by regulators in China and South Africa.
In late January, the Wall Street Journal reported that South Africas Competition Tribunal
conditionally approved the proposed merger between the two companies. There has been a
particular sense of uncertainty with regards to approval by the South African authorities as they
were considering complaints from two of the countrys biggest metal and mining unions and the
state-owned electricity producer, Eskom Holdings Ltd, about lay-offs and potential coal-price
increases from the deal.

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Nevertheless, there was

The competition authorities laid down the following conditions:

still risk that the deal

Glencore Xstrata International would be limited to a maximum

would be disapproved
by regulators in China
and South Africa.

of 80 dismissals of skilled employees and 100 dismissals of

semi-skilled or unskilled employees, which can only take place
in the two years after a 90-day review is completed in
consultation with the unions. Their provisions are not seen as

draconian for a country suffering a 25 per cent unemployment rate. Chinese regulatory approval
is still pending. In fact, the two companies had to extend the completion date twice. The original
date of completion, 31 December 2012, was initially extended to 31 January 2013, and
subsequently rolled over to 15 March. By the time you are reading this, the two companies
should be close to finalising (if not already have finalised) the agreement.
Finally, as an example of the truly enormous scale of this deal, analysts have calculated that the
combined entity will account for about 2.1 per cent of the of the FTSE 100 index. In other words,

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An Overview of the GlencoreXstrata Merger - The Student Lawyer

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Glencore-Xstrata will be more than twice as large as the average FTSE 100 company.

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