Investors baulk at $90bn Glencore and Xstrata deal

Hundreds of millions of dollars are wiped off the market value of Xstrata as some of its biggest shareholders object to the record $90 billion deal with Glencore.

A miner goes to work in an Xstrata mine in South Africa. The Swiss mining company is planning to merge with Glencore. Xstrata via Bloomberg News

Hundreds of millions of dollars were wiped off the market value of Xstrata, the mining company involved in a merger with the commodities trader Glencore, as some of the group's biggest shareholders objected to the record US$90 billion (Dh330.57bn) deal.

Glencore, the world's largest commodities trader, part-owned by Abu Dhabi's Aabar Investments, has agreed to buy the mining company with an offer of 2.8 new shares for each Xstrata share, valuing the mining company at $62bn. Glencore already owns 34 per cent of Xstrata.

But the deal is opposed by Schroders and Standard Life Investments, two of Xstrata's top 10 investors. The two shareholders object to the valuation.

"Although we see some merit in the merger of Xstrata and Glencore, the proposed exchange ratio clearly undervalues Xstrata's assets and future earnings contribution," said David Cumming, the head of equities at Standard Life Investments. "Consequently it is our intention to vote against the deal unless the merger terms for Xstrata shareholders are materially improved."

Other investors shared his concern, as Xstrata's share price fell by almost 5 per cent in London, at one point wiping close to £2bn (Dh11.6bn) off the company's market value. The company is listed in London.

"This is a fabulous deal for Glencore, it's probably a great deal for the Xstrata management, but it's a poor deal for Xstrata's majority shareholders," said Richard Buxton, the head of equities at Schroders, who vowed to follow Standard Life's lead and vote against the merger.

Mick Davis, the chief executive of Xstrata, had earlier hailed the takeover as "a unique opportunity to create a new business model in our industry to respond to a changing environment".

The combine, if approved, would be known as Glencore Xstrata International. The new entity would have a combined market value of about $90bn and total combined sales of $209bn. The merged entity is expected to be listed in London and Hong Kong, if the deal goes ahead.

The new group would cover the whole mining spectrum, including processing, storage, freight, logistics, marketing and sales, the companies said in a joint statement.

The "merger of equals" also combines Glencore's global trading operations for energy, metals and agricultural products with Xstrata's coal, copper and zinc resources. According to the Swiss banking giant UBS, it would be the world's biggest producer of zinc, lead and thermal coal, and a top-five supplier of copper and nickel.

Glencore attracted $1bn in investment by Aabar at an initial public offering last year, making the Abu Dhabi fund the largest cornerstone investor.

Analysts have speculated that the new company would seek to expand further, and this notion has been encouraged by Mr Davis.

"M&A [mergers and acquisitions] is a space that you'd expect the combined group to be in," said Mr Davis, who would be chief executive of the combined company, told Reuters.

Growing demand for commodities from developing countries and increasing difficulties in extracting raw materials has driven the mining sector towards consolidation. The value of mergers and acquisitions of mining companies totalled almost $100bn last year, the highest levels since 2007, according to Bloomberg statistics. Citigroup estimates that mining companies could spend up to $134bn in developing their assets this year.

The largest takeover in the industry is Rio Tinto's acquisition of Alcan for $38bn in 2007. A year later, a $66bn takeover attempt of Rio Tinto by BHP Billiton, the world's largest miner, failed.

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