An Overview of the Glencore–Xstrata Merger - The Student Lawyer

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An Overview of the GlencoreXstrataMerger" Commercial & Finance #February 14, 2013 $0 %Georgi Korchev

Ifyou are reading this article, then someone somewhere (probably a law firm recruiter) has told

you that it is important to improve your commercial awareness. Well, you have come to the right

place! Here at TSL, we are very keen on commercial awareness and what better way to start than

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.

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

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

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 wasits largest shareholder at 34 per cent. Glencoreleaders Willy Strothotte and Ivan Glasenberghave

been on the board of Xstrata since 2006. Furthermore, Glencore was instrumental in the

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A deal of this kind is

inevitably going to draw

attention from the

European Commission

and other global

competition authorities.

The second issue was the takeover price. Glencore initially

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

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.

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

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

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

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

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

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

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

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.

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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