Xstrata released an indifferent set of interim figures a month ahead of the shareholder vote that will determine whether the global miner is to be subsumed by Glencore. The chances of the deal being voted through without a sweetener look slim and, if the companies stay apart, we see more value in Xstrata's current prospects.
The Xstrata headline figures reflect the general decline in bulk commodity prices, but an emphasis on cost reduction enabled the group to post underlying profits ahead of consensus estimates. Though this is hardly a game changer, it could provide some ballast for those shareholders who think they’re getting a raw deal under the terms of the proposed merger.
The Swiss commodities trader owns just over a third of Xstrata shares, but cannot vote those shares with regard to the merger, so the deal is far from a fait accompli. Particularly given the vocal opposition to the deal terms from the second largest shareholder, Qatar Holding, which holds 11.4 per cent of Xstrata or effectively 17.3 per cent of the reduced voting catchment. Glencore is currently offering 2.8 shares for each Xstrata share, but the Qatari sovereign wealth fund is pushing for a revised scrip offer of at least 3.25 Glencore shares. Given that a three-quarter majority is required to approve the merger, the Qataris are in a strong position to force their hand.
Opinions are still divided as to the rationale for the merger. Admittedly, the Xstrata board is backing the deal, but given the absurdly generous loyalty bonuses on offer, that’s hardly surprising. The Qataris, on the other hand, might point to the fact that Glencore shares are still under water some 15 months after the group's much-hyped listing. The group's market value has contracted by 37 per cent in the intervening period. But Xstrata's corresponding decline correlates almost exactly with that of Glencore, so the relative scrip value has remained largely unaltered in proportional terms.
