Fund managers at Schroders and Standard Life have already declared their opposition, highlighting the fact that a 'merger of equals' that will end up with Xstrata shareholders owning 45 per cent of the combined entity, isn't very equal. "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," Schroders' Richard Buxton told Reuters. These two investors account for less than 4 per cent of Xstrata in aggregate, but their vocal opposition might be mirrored among other, more publicity-shy, investors.
Away from the valuation argument, some commentators have targeted their ire at the potential bumper executive pay day the deal could produce. At Xstrata, a change of control clause allows all long-term incentive plans to vest in full, although chief executive Mick Davis has already pledged to roll over his potential £6m as he will remain chief executive. Nonetheless the potential sums involved, coming on top of the paper billions made by Glencore executives last year, will not chime well right now when executive pay is such a sensitive issue.
The deal is also likely to attract regulatory scrutiny, given the power it would give the group in some commodities like coal. And regulatory concerns have scuppered a number of mining mega deals in recent times, most notably Rio Tinto and BHP's proposed tie-up, and the latter's attempt to buy Canada's Potash Corp.
This merger looks good for the executives on both sides, Xstrata's will dominate the merged entity's board and Glencore's will remain major shareholders in a business which looks to be getting good assets for a very decent price. But it is not necessarily a good deal for Xstrata shareholders; the implied premium to Xstrata's pre-deal share price is only around 8 per cent. Analysts think Glencore could afford to pay around 15 per cent, given the minimum $500m annual savings it expects.
This is a scheme of arrangement in which Glencore is not allowed to use its 34 per cent voting block, so only 16.5 per cent of Xstrata's investors have to vote against the deal to see it fail. Investors should be minded to reject the offer in the hope that Glencore comes back with more appropriate terms.