Glenstrata: Through a Glass Darkly

11th September 2012

For those of us toiling in the vineyard of responsible investment there are always ‘problem' companies.

The on-off merger of Glencore and Xstrata provides ample opportunity, not surprisingly, to examine at close hand a £56bn mega-deal that raises many questions for ethical and responsible investors.

At the time of writing the outcome is still uncertain, but revised terms seem to have led most commentators to conclude that Xstrata will recommend the deal. They can hardly not recommend a higher offer, when they so convincingly sat behind the original lower one, scuppered in the main by the Qatari investors who made it clear they were unimpressed by Glencore's all paper proposal.

For two companies with more connections than the National Grid, one might assume that the current mess could have been avoided. Whilst Glencore cancelled its proposed Extraordinary Meeting in Zug, Switzerland last Friday, Xstrata apparently unaware until the 11th hour of a change of terms went ahead with theirs, only to put a redundant resolution to those gathered to postpone the meeting until further notice. At the very least this shows enormous discourtesy to shareholders of both companies. Glencore had more than sufficient time to raise its offer or walk away rather sooner than 11 am on the morning of the meeting to put the merger to a vote.

The Qataris, having asked for 3.25 Glencore shares to support the deal, will, supposing the Xstrata Board falls into line, have to decide whether to accept a marginal improvement of 3.05 shares. What was once billed as a merger of equals has without comment or warning become an all paper hostile takeover. Shareholders must be bemused, and no more so than by what went on in a Mayfair Hotel between Glencore Chief Executive, Ivan Glasenberg, a single shareholder (the Qatari Holding) and fixer, Tony Blair.

Market acceptance that this could be the clincher suggests the financial markets have learnt little from the collapse in trust over the past four to five years. Investors expect a premium to be offered for hostile takeovers, and Glencore is offering no cash. By their own admission, a company whose bread and butter is striking low cost deals, is getting Xstrata and its world-class assets on the cheap.

Corporate governance watchers are also alive to the strange nature of this deal which has proposed excessive retention rewards for existing management amounting to £173m, including £29m to the CEO of Xstrata for him to stay on for three years. Incentivising excess is seldom in shareholder interests, and given a motivated, committed management at Xstrata this raised the ire of many investors to the extent that it may have, in any case, scuppered the deal. The merger was contingent on shareholders holding their nose at the vast transfer of wealth to the directors and management.

However, under the new terms, so far as yet unexplained, the Chief Executive of Glencore will now control the enlarged Group (after a six months handing over period), forcing the Xstrata CEO to leave (with an equally healthy payoff). Glencore seems to be saying that the price of raising its offer is to alter intrinsically the terms of the deal itself, unmasking the cover of it being a more benign ‘merger of equals' to one of outright takeover.

Within the mining world Xstrata has a generally good reputation for managing environmental and safety risk. It has seen a commendable fall in recordable frequency injury rates (per million hours worked) to 5.2, a 26% fall on 2009. A focus on embedded safety programmes has borne fruit at Xstrata, and this is replicated in its occupational health programmes including HIV/AIDS testing, counselling and care. Xstrata is a long term business; projects typically have a forty to fifty year life with planning centred on construction, operation, closure and remediation. Glencore is relatively new to the glare of public scrutiny as the uncomfortable exposure given it by BBC Panorama earlier this year demonstrated. As a listed company, accountable to shareholders, communities and wider society, Glencore will need to demonstrate it can bring a long term qualitative perspective to non-financial disclosure. Its short term trading vision may be incompatible with the studied long-term duty of care Xstrata is forced to bring to its operational management, thereby heightening exponentially, potential areas of risk.

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