LONDON (Dow Jones)–The chief executive of commodity giant Glencore International PLC (GLEN.LN) said the share swap ratio in its proposed merger of equals with Xstrata PLC (XTA.LN) is fair, and that his job now is to convince Xstrata’s shareholders why the deal makes sense at the current valuation.
Glencore has agreed to issue 2.8 of its shares to Xstrata shareholders for every Xstrata share held, as it seeks to create a commodities juggernaut with a market capitalization, at the time of announcement, of around $90 billion and assets in oil, base metals, precious metals, shipping and agriculture. Four Xstrata shareholders, accounting for nearly 5% of the company’s total outstanding capital, have said this isn’t sufficient. About 16.4% of Xstrata’s voting shareholders need reject the deal to block it.
“We believe it is a very fair price. It is a price that has been accepted by the Xstrata CEO, unanimously accepted by the [Xstrata] board and proposed by the board to the their shareholders,” Ivan Glasenberg told Dow Jones Newswires Monday.
Glasenberg said Glencore’s management will now go on a roadshow, in which it will meet with Xstrata shareholders who don’t own Glencore shares, to better explain what he sees as misconceptions about Glencore’s business–the quality and size of its industrial assets and the way its marketing business operates.
“Our job now is to visit the Xstrata shareholders and try to convince them that the [Glencore] paper they are getting is good paper,” Glasenberg said. “We have to explain to them a bit more of the Glencore model.”
He declined to comment on whether there was scope to increase the share swap ratio.
A Dow Jones poll of seven analysts show that Glencore will likely have to bump up the ratio to 3.0 to secure a favorable vote from Xstrata’s shareholders.
Glasenberg said the current deal represents an attractive premium to Xstrata shareholders, particularly since Xstrata’s management will hold many of the top jobs in the merged company and a merger of equals usually doesn’t have very large premiums.
Glasenberg said that his company has “tier-one, low-cost producing assets,” as evidenced in the Congolese Katanga and Mutanda copper mines that are mining “higher grades of copper than any mine in the world” and have long lives of 40-50 years, he said. Similarly, the Prodeco coal mine in Colombia and Kazzinc’s gold operations are also low-cost, tier-one assets, he said.
Glasenberg also said his job was to convince Xstrata’s shareholders that Glencore’s marketing business isn’t a platform for speculative derivatives trading, but rather a logistics business which generates profits by, for instance, blending products to better suit customer needs and directing shipments to benefit from discrepancies in regional commodity pricing.
Glasenberg also said that Glencore’s investment model is focused on generating high return on equity, not just on building a mine for the sake of building a mine. He said that the company has generated 35%-60% average annual return on equity since it was founded 37 years ago.
Glasenberg will begin a roadshow, along with Chief Financial Officer Steve Kalmin, to explain the merits of the Glencore business to Xstrata shareholders, ahead of a second roadshow, in April, with Xstrata’s Chief Executive Mick Davis.
-By Alex MacDonald, Dow Jones Newswires