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1. Rationale for Merger …

1. Rationale for Merger
2. Extraction Industry Value Chain
3. Valuation
4. Deal Structure
5. Issues and Challenges

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  • 1. Merger & Acquisition Project:Glencore and XtrataCreating Strong RelationshipsSubmitted by:Akshay GuptaSwati JindalArnav KapurKapish KaushalSachit AroraVaibhav Gupta
  • 2. Merger and Acquisition Project: Glencore & Xtrata Merger & Acquisition Project: Glencore and Xtrata Contents1. STRATEGIC DUE DILIGENCE/RATIONALE FOR MERGER ................................................................ 1 1.1. ABOUT GLENCORE .................................................................................................................................. 1 1.2. ABOUT XTRATA ....................................................................................................................................... 1 1.3. RATIONALE FOR MERGER ....................................................................................................................... 2 1.4. POSITIONED FOR A CHANGING ENVIRONMENT ........................................................................................ 2 1.5. OPPORTUNITIES ACROSS THE ENLARGED ASSET PORTFOLIO ............................................................... 62. EXTRACTION INDUSTRY VALUE CHAIN – GENERAL OVERVIEW ................................................. 7 2.1. GLENCORE-XSTRATA VALUE CHAIN AND STRATEGIC BENEFITS............................................................ 73. VALUATION .................................................................................................................................................... 10 3.1. NEED FOR A PREMIUM ........................................................................................................................... 10 3.2. POTENTIAL SYNERGIES ......................................................................................................................... 12 3.3. BUSINESS MIX ........................................................................................................................................ 16 3.4. HOW A COMBINED XTA / GLENCORE MIGHT LOOK .............................................................................. 174. DEAL STRUCTURE........................................................................................................................................ 20 4.1. INVESTMENT BANKS INVOLVED ............................................................................................................ 215. WHY THE DELAY? ISSUES & CHALLENGES FACED .......................................................................... 23 5.1. ISSUES ON THE PRICE TERMS ............................................................................................................... 24 5.2. EXECUTIVE COMPENSATION ................................................................................................................. 25Copyright © 2012 IIFT. All rights reserved
  • 3. Merger and Acquisition Project: Glencore & Xtrata 1. Strategic Due Diligence/Rationale for MergerA combination of Glencore and Xstrata represents an outstanding opportunity to createvalue for shareholders. The merger would lead to the creation of a major natural resourcesgroup with a combined equity market value of $90 billion and a unique business model, fullyintegrated along the commodities value chain, from mining and processing, storage, freightand logistics, to marketing and sales.1.1. About GlencoreGlencore, headquartered in Baar, Switzerland, is one of the worlds leading integratedproducers and marketers of commodities. Glencore has worldwide activities in theproduction, sourcing, processing, refining, transporting, storage, financing and supply ofmetals and minerals, energy products and agricultural products..Its customers around the world are active in a wide range of industries, such as automotive,oil, power generation, steel production and food processing. The customers rely uponGlencore’s established global network for the supply of metals and minerals, energyproducts and agricultural products. These commodities either originate from Glencores ownproduction assets or are sourced from third parties.Glencore listed on the London Stock Exchange in May 2011 and is a constituent of the FTSE100 Index. It has a secondary listing on the Hong Kong Stock Exchange1.2. About XtrataXstrata is an Anglo-Swiss multinational mining company headquartered in Zug, Switzerlandand with its registered office in London, United Kingdom. It is a major producer of coal (andthe worlds largest exporter of thermal coal), copper, nickel, primary vanadium and zinc andthe worlds largest producer of ferrochrome. It has operations in 19 countries across Africa,Asia, Australasia, Europe, North America and South America.Xstrata has a primary listing on the London Stock Exchange and is a constituent of theFTSE 100 Index. It has a secondary listing on the SIX Swiss Exchange. Its largestshareholder is Glencore International plc, which has a stake of approximately 34%Copyright © 2012 IIFT. All rights reserved P a g e |1
  • 4. Merger and Acquisition Project: Glencore & Xtrata1.3. Rationale for MergerThe merger will bring together two companies that have grown in parallel one a majorglobal diversified mining company and other a leading marketer of commodities. Themerger would create a unique business model to capture value in a changing landscapeand would enable Glencore and Xtrata to have significant presence across the entire valuechain as illustrated below. The merger therefore, presents an exciting opportunity to createa unique business better able to capture value from changing industry dynamics andredefine the competitive landscape. Traditional miners Glencore and Xstrata Traders Exploration Exploration Mining / producing Mining / producing Processing / refining Processing / refining Logistics Logistics Marketing & Trading Marketing & Trading1.4. Positioned for a changing environmentThe shift in the locus of global demand growth for commodities away from the OECD to thelarge developing nations, led by China, has had an important impact on global trade flows.The value chain for commodities is becoming longer, in geographic terms, and morecomplex, with new logistical infrastructure being required to address new trade flows.At the same time, the sources of supply of commodities are also diverging. Producers arelooking further afield for access to new resources to highly prospective emerginggeographies as traditional mining regions approach depletion. New small-and medium-sized producers are rapidly emerging from these countries, seeking access to core marketsbut with limited marketing capabilities and constrained access to infrastructure, finance andlogistics. In addition, the social licence to operate and gain access to new resources,irrespective of the region, will be determined increasingly by companies’ sustainabilitycredentials and their relationships with their communities. The convergence of these trendsmeans that Xtrata’s and Glencore’s areas of expertise are merging, to create opportunitiesfor those companies that can position themselves to compete in an integrated way in thisCopyright © 2012 IIFT. All rights reservedevolving environment. P a g e |2
  • 5. Merger and Acquisition Project: Glencore & XtrataIncreased scale will improve the risk profile of the companies and enhance access tocapital markets. With access to superior market intelligence, relationships with thousands ofsuppliers and customers and the sustainability and operating expertise to operate inemerging producing regions, Glencore Xstrata will be well placed to capture newopportunities across the globe.Combination of two complementary businesses with long-standing links and the logical nextstep for both companies against a changing industry environment  Combines the premier global commodities marketing business and a world-class operator of metals and mining assets, each with outstanding track records of growth and value creation, and integrates two portfolios of assets and projects with industry leading growth prospects and combined production growth of 11 per cent. on a compound annual basis to 2015  Combined Group will have a significant and expanded operational footprint, including positions in the next major regions for mining investment, including African copper-belt, Kazakhstan and South America  Creates substantial new optionality and greater strategic and financial flexibility  Combined Group will benefit from enhanced scale and market positions in the production and marketing of key commodities, as well as an industry-leading diversification profile by commodity and which improves cash flow diversificationCopyright © 2012 IIFT. All rights reserved P a g e |3
  • 6. Merger and Acquisition Project: Glencore & XtrataPositioned to Respond to Supply- Demand Uncertainties and Changing IndustrydynamicsThe demand and supply drivers along with the key areas of integration and the rationale forthe deal are elaborated below. The long term potential of the deal and the opportunities andbenefits to be derived from the enlarged asset portfolio are explained in the subsequentsection Drivers Areas Key Aspects Rationale Demand Population Metals  Growing commodity intensity Leading marketer of Growth including early cycle zinc and copper commodities Urbanization Energy  Growing energy demand as Leading trader in BRIC’s still have low per seaborne thermal capita energy consumption coal and oil Increase in Agriculture  Growing food demand and Leading grain Wealth changing consumption exporter from patterns Europe/CIS/Aus Supply Areas Key Aspects Rationale Industry at Metals  Mine supply growth Top 5 producer of Full Capacity constraints copper, nickel, zinc  New supply increasingly challenged by infrastructure Ageing Energy  New resources and reserves #1 export thermal Mines/falling situated in challenging coal, growing coal grades locations and limited producer infrastructure Challenging Agriculture  Growing food demand and Growing production New changing consumption base Geographies patterns Key Point Glencore Xtrata is uniquely positioned to capture valueCopyright © 2012 IIFT. All rights reserved P a g e |4
  • 7. Merger and Acquisition Project: Glencore & XtrataThe longer term potential of a combined group will enable Glencore Xtrata to have adistinctive competitive positioning allowing Glencore Xstrata to see and accessopportunities from new sources of growth across multiple geographies and commoditiesand along an evolving value chain. It will be able to create deeper and more responsivecustomer and supplier relationships, leveraging the power of an integrated global network,expertise and operational capabilities to provide enhanced security of supply, a broaderrange of products and qualities, and new services to manage evolving risks, for example inlogistics, financing or sourcing.Commodity trade flows are shifting as demand growth is centred on emerging Asianeconomies and the supply of commodities is increasingly sourced from more remote,challenging and often logistically-constrained locations, with a range of new industryentrants.The Combined Group will benefit from:  Access to new sources of growth, prospective geographies and new commodities at multiple points along the value chain;  Optimisation of product, marketing and trading interfaces;  Superior industry insight through unique network and market intelligence;  Entrepreneurial culture, devolved authority, and strong momentum;  Operational excellence, proven cost improvement track record and leading sustainability framework;  Scale and diversity and organic growth options;  Appropriate financial strategy, strongly positioned for continuous access to equity and bond markets;  Access to a fleet of over 200 vessels and strategically located logistical infrastructure;  Expanded product flow to provide customers with a greater range of product qualities, specifications and commodities from a more flexible, geographic base of operations including from access to third party supply;  Improved ability to compete for access to resources, with enhanced financial flexibility and an established sustainability and governance framework; andCopyright © 2012 IIFT. All rights reserved P a g e |5
  • 8. Merger and Acquisition Project: Glencore & Xtrata  Best in class sustainability and operating credentials combined with a commitment to transparency to maintain a social licence to operate and ongoing access to resources1.5. Opportunities across the enlarged asset portfolio Geographical Product Timing Freight and Logistics  Triangulation of  Diverse commodity  Glencore  Freight and logistics freight movements range, supply base and Xstrata is able operations are key to and regional supply/  extensive storage, to benefit from supporting marketing Opportunity demand dynamics handling and ‘inefficiencies’ strategies, processing capabilities in the shape of understanding trade  enable exploitation of the forward flows price differentials price curves across various products  Extensive and global  Blending different  “Carry trades”  By being able to commodity books grades to meet contract booked in physically transport provide opportunities requirements at a lower contango and store products to to enter swap overall cost markets can take advantage of agreements to  Locking in processing benefit from prevailing market optimise physical margins to take lower financing conditions Key Aspect delivery schedule advantage of price and storage  The scale of  Optimisation of differentials between costs than operations ensures existing contracts unprocessed and those implied low cost results in reduced processed product by the forward transportation, often shipping costs and  Substituting products curve allowing Glencore higher profit margins where an end-product Xstrata to win compared to standard can be produced from a contracts by offering a trades number of commodities lower unit price than competitorsCopyright © 2012 IIFT. All rights reserved P a g e |6
  • 9. Merger and Acquisition Project: Glencore & Xtrata 2. Extraction Industry value chain – General OverviewThe extractive industries is known for generating high economic rent—the differencebetween the value and cost of production—and the government’s share of this rent can bevery large in times of high commodity prices, as in the last several years. However,extractive industry (EI) revenue has some characteristics—volatility, uncertainty,exhaustibility, and the fact that it originates largely from abroad—that challenge policymakers. Many resource-rich countries have fallen prey to the “resource curse,”1 underwhich poor policy choices and corruption have exacerbated the cycles of poverty andconflict.The EI value chain approach can be integrated into resource-rich countries’ developmentplans and poverty reduction strategies. As such, it represents a path toward combating theresource curse, raising standards of living, and helping achieve political and social stability.The basic value chain contains the below mentioned five steps: Implementation Regulation & Reveneue Award of contracts & Collection of taxes & ofsustainable monitoring of management & licences royalties development operations allocation policies and projects2.1. Glencore-Xstrata value chain and strategic benefitsA merger between Glencore and Xstrata is the logical next step for both companies. Thistransaction represents a natural combination of two complementary businesses, each withan outstanding track record of shareholder value creation, entrepreneurial managementteams and a proven ability to see valuable opportunities and execute them. GlencoreXstrata would be positioned to create value from each step of the commodities value chain,from resource extraction to customer sales, at a time when demand for our combinedproducts continues to grow. A growing world population, a rising middle class and ongoingurbanisation and industrialisation in emerging economies will underpin demand for ourexpanded range of products for years to come. At the same time, supply remainsconstrained due to historic underinvestment, ageing operations and the challenges ofbringing new production to fruition.Copyright © 2012 IIFT. All rights reserved P a g e |7
  • 10. Merger and Acquisition Project: Glencore & XtrataWith access to superior market intelligence, relationships with thousands of suppliers andcustomers and the sustainability and operating expertise to operate in emerging producingregions, Glencore Xstrata will be well placed to capture new opportunities across the globe.The merger will be earnings accretive to Xstrata shareholders from the first year. Ourshareholders will continue to benefit from our organic growth potential, complemented byGlencore’s near-term, high-return growth to give the combined group a compound annualgrowth rate of 11% per annum in copper equivalent tonnes from 2011 to 2015.While the terms are clearly advantageous to Xstrata shareholders, they do not cause apunitive dilution that would be unacceptable to Glencore shareholders and would probablybe reflected in the share price. Both companies’ shareholders will benefit from the value-adding potential of the combination, immediate synergies of $500 million per annum fromthe first full year post completion and the financial and strategic flexibility to pursueopportunities within and external to the expanded business.Copyright © 2012 IIFT. All rights reserved P a g e |8
  • 11. Merger and Acquisition Project: Glencore & XtrataGlencore Xstrata will create a vertically integrated, strategically flexible and nimblebusiness. Combined with the strategic flexibility and capabilities to respond to an industrythat is evolving ever more rapidly, Glencore Xstrata will be positioned to continue bothcompanies’ track record of creating superior shareholder value – the whole will be greaterthan the sum of its parts. Xstrata’s independent directors have unanimously recommendedthe transaction to Xstrata’s shareholders.Copyright © 2012 IIFT. All rights reserved P a g e |9
  • 12. Merger and Acquisition Project: Glencore & Xtrata 3. ValuationValuation implications under various scenarios using an earnings accretion /dilutionmethodology have been carried out. Under a nil premium merger scenario and based oncurrent share prices, it is estimated that existing XTA shareholders ex Glencore wouldcontrol 35% of the combined entity.3.1. Need for a premiumThere are benefits from an Xstrata perspective from this deal like earnings diversification,operational synergies and project pipeline optimisation. However, Xstrata’s premiumdemand will flow due to the following reasons: 1. The XTA business model may potentially be diluted by a combination with Glencore in the eyes of some investors: At present XTA is a high-growth upstream miner moving toward higher margin better quality assets than in the past. A merger with Glencore would add the marketing side of Glencore’s business and add an industrial asset base that is more emerging market based, smaller scale and generally lower quality. 2. Multiple arbitrage: from an EPS basis, Glencore’s higher P/E multiple relative to XTA would make a deal immediately accretive pre-synergies for Glencore without a premium, on certain estimates. For XTA, a deal would likely thus be dilutive to its standalone businesses, and shareholders might demand a premium and / or cash component. 3. Access to Xstrata’s cash flows: as a pure upstream mining company, it is expected from Xstrata to generate strong cash flows over the coming years. ACopyright © 2012 IIFT. All rights reserved P a g e |10
  • 13. Merger and Acquisition Project: Glencore & Xtrata combination would give Glencore access to these cash flows and provide greater capacity for growth and greater direct leverage to the commodity cycle. 4. Control premium: Currently Glencore has a minority 34.5% stake in XTA. Under a nil premium offer based on current market caps, it is likely that Glencore would control 66% of the enlarged company. As such, XTA investors might demand a control premium to reflect these changes in control.Potential deal premiumDue to P/E arbitrage, any bid for XTA below a 29% premium would be accretive toGlencore 2012E earnings (without the need for synergies). In order to justify a premiumabove 29%, however, a combination of the two companies would require synergies. Basedon mid-range net profit synergy estimate of $475m, it is believed that Glencore could payup to a 42% premium for XTA before eliminating the synergy gains for Glencoreshareholders.Provided below is the sensitivity analysis which indicates the estimates of the level of netsynergies needed to justify a range of premia in a merger scenario.Below is shown Glencore and XTA’s current shareholder ownership stakes in the combinedcompany at different premium levels: on the base case of a 42% premium, it is assumedthat Glencore shareholders would own some 56.6% of the company.Copyright © 2012 IIFT. All rights reserved P a g e |11
  • 14. Merger and Acquisition Project: Glencore & Xtrata3.2. Potential SynergiesSince Glencore’s IPO, XTA is down 44%, Glencore down 21% and the implied Glencorestub ex XTA only 7% – significant outperformance. In terms of multiples, XTA now trades at4.5x consensus 12-month forward P/E vs. Glencore at 6.5x – a 40% spread compared to a5% spread just after IPO.It was only a matter of time since Glencore’s IPO that when the company would attempt amerger/takeover of its associate company, XTA, where it currently has a 34.5% stake.Glencore had stated its desire to grow the industrial side of the business in order to gaingreater direct leverage to the commodity cycle and greater market share to feed marketingactivities. XTA, with its close links to Glencore and with strong growth prospects, had to bethe most obvious target and a combination could create an attractive high-growth anddifferentiated major.The potential operational synergies could be estimated on an earnings accretion/dilutionbasis. There is limited operational overlap between Glencore and XTA industrial assets.The industrial asset synergies would be broadly limited to central cost savings,procurement, etc. rather than any significant operational overlap and cost saving potentialwithin the assets themselves.Copyright © 2012 IIFT. All rights reserved P a g e |12
  • 15. Merger and Acquisition Project: Glencore & XtrataThe main area of potential synergy is going to be through the marketing side of thebusiness, where the combined entity could leverage the total group production to generategreater profits through greater market share and arbitrage opportunities. The main upsidepotential is going to be within the copper, zinc and coal marketing operations. In totalsynergies of $280m to $794m at the EBIT level and $246m-$704m at the net profit level (2-6% of 2012E combined net income) is estimated.If we compare this synergy estimate with other ‘mega deals’ that have been on the table inthe past, the value creation potential may not look as significant. At the time of XTA’sattempted merger with AAL, XTA estimated that pre tax synergies were at least $1bn.BHPB estimated that there were pre-tax synergies of $3.7bn between BHPB and RIO. Bothof these failed deals were between companies where the operational overlap looked farmore obvious. However, in a lower price commodity/equity price environment, synergiescan become incrementally more valuable.Break-Up of Synergies:Marketing Synergies:One of the key disadvantages from not having 100% control over XTA was that Glencoremust carry out any sales or purchases at arm’s length due to related party rules. Thislimited the full utilisation of Glencore’s marketing capabilities and distribution platform. If thetwo companies were combined, however, this obstacle would be removed. In total, $230-684m of synergies are estimated within the marketing operations at the EBIT level, basedon the analysis of the current commodity agreements that XTA has with Glencore.Copyright © 2012 IIFT. All rights reserved P a g e |13
  • 16. Merger and Acquisition Project: Glencore & XtrataThere is a potential for huge benefit particularly in copper, zinc and coal. The following chartshows the potential zinc and copper synergies in a merger scenario:Industrial Synergies:There is likely to be limited operating synergies despite the optical geographical overlap ofkey assets (South American coal, South African coal, South American copper, Australiancopper, South American zinc and Australian nickel)As the diagrams below show, at first glance there appears to be potential for overlap ofassets and therefore savings to be had in South America, Australia and South Africa. Xstrata EBITDA Glencore EBITDA Split Split South Americas North Americas South Americas North Americas Australasia Europe Australasia Europe Africa Africa 7% 8% 5% 0% 20% 36% 12% 38% 60% 14%Copyright © 2012 IIFT. All rights reserved P a g e |14
  • 17. Merger and Acquisition Project: Glencore & XtrataHowever, a continent specific analysis shows a very different picture.In South America, Glencore has a limited copper footprint, with just the Punitaqui mine andconcentrator in Chile. There is limited to nil synergies from tying up this asset with theXstrata assets, given that Collahausi is a JV and the JV partners might be resistant to anytie-up; also, Lomas Bayas mine is located in the Antofagasta region, while the Glencoreasset is located several 100km to the south. In Copper, Glencore’s Cobar mine is located inNew South Wales in Australia, while both Xstrata’s assets are in Queensland. To thatextent, lack of geographical proximity limits any industrial synergies. Moreover, theGlencore asset has a self-serving concentrator and plans for a shaft extension, limiting anypotential synergies from rationalising assets and capex plans.For Zinc, the only asset overlap is in South America. Within South America, Glencore’sPeruvian assets and Xstrata’s assets may at first glance offer potential for savings.However, Glencore has only a small non controlling stake in Volcan – which is the biggestproducer on a 100% basis – therefore limiting any cooperation. The Xstrata Antamina assetis a JV between Xstrata, BHP, Teck and the Mitsubishi Corp., making it difficult to envisageany deep tie-up with the Glencore assets, despite close proximity (both Los Quenuales andAntamina are in the Ancash region).In South Africa, coal offers some synergy potential given proximity of operations andsavings are expected here. Glencore already has sufficient export entitlement out of SouthAfrica and so a potential tie-up with XTA would not be needed from this standpoint.Shanduka currently ships its export coal out of the Richards Bay coal terminal and the Portof Durban, as well as the Maputo port and Matola coal terminal in Mozambique. Glencorehas 439k Mt per annum of committed export entitlement at Richards Bay and a 5-yearcommitment to export 1.7mtpa through the Maputo port and Matola coal terminal. In 2010Glencore exported 1.5mt of Shanduka coal. Subject to certain conditions being met,Glencore’s potential stake in Umcebo will give it access to 1.5Mtpa of export allocation atRichards Bay.Examining both Xstrata and Glencore’s assets, both companies have Nickel assets inAustralia. However, while XTA’s are 100% owned, the ownership structure at Glencore’Copyright © 2012 IIFT. All rights reservedassets is more complex. Glencore owns 40% of the Murrin Murrin Nickel mine, which is a P a g e |15
  • 18. Merger and Acquisition Project: Glencore & XtrataJV with Minara (which owns 60%). Glencore also directly owns over 90% of Minara. Allthree assets are located in Western Australia and are within 150km of each other.Hence, the expectation of low industrial synergies.3.3. Business mixAdding together XTA’s industrial footprint, and Glencore’s blended marketing and industrialmix, it is estimated that a combination of the companies would result in a company with19% of EBIT attributable to marketing activities and 81% to industrial activities based on2011E. The total contribution of marketing to the combined group would therefore berelatively low compared to the standalone Glencore and would reduce earningsdiversification in that respect, so it might also have implications for valuations.2008-2010 marketing EBIT made up a larger proportion of pro forma group EBIT (24%average over the three years). However, given the majority of growth planned in bothcompanies is skewed toward industrial assets, marketing would make up 16-19% (2011-13E) of Group EBIT on the estimates going forward.On a commodity basis, both XTA and Glencore individually have large exposures to basemetals (in particular zinc and copper) and thermal coal. Combined, copper would representsome 39% of 2011E industrial EBITDA followed by coal at 29% and zinc at 19%. At leastCopyright © 2012 IIFT. All rights reserved P a g e |16
  • 19. Merger and Acquisition Project: Glencore & Xtrataon the industrial side, a combination would add little commodity diversification to XTA,although it would add regional diversification toward DRC/Zambia and Kazakhstan.3.4. How a combined XTA / Glencore might lookBelow are the Income Statements and Balance Sheets of XTA, Glencore and the combinedfirm. Estimated values for the future years ie 2012 and 2013 have been calculatedassuming appropriate growth percentage of revenues, Capex and Working Capitalrequirements.Copyright © 2012 IIFT. All rights reserved P a g e |17
  • 20. Merger and Acquisition Project: Glencore & XtrataA combined company, based on the forecasts, would have revenues of over $200bn inFY11, EBITDA (pre associates, pre exceptional) of over $18bn and net income of c$9.3bn.At the net level, this would place higher than Anglo’s, but still some way behind BHP andRIO.Balance SheetsCopyright © 2012 IIFT. All rights reserved P a g e |18
  • 21. Merger and Acquisition Project: Glencore & XtrataCopyright © 2012 IIFT. All rights reserved P a g e |19
  • 22. Merger and Acquisition Project: Glencore & Xtrata 4. Deal StructureThe expected deal terms are as follows:  34.4% - Existing Holding Size in Xstrata Share Swap Ratio : 2.8 Glencore shares for every Xstrata Share – was offered earlier  Glencore gave an All offer – to buy remaining 65.92% of Xstrata  15.2% : Premium offered to Xstrata’s Shareholders on the present offer  Total Value of Merged Entities : USD 90 Billion  Xstrata free float shareholders will own 45% of Glencore Xstrata  Xstrata shareholders are due to vote not only on the terms of the deal but also the retention packages. Unusually, the two votes are linked – if shareholders vote against the pay deals, the merger will fall through. Both companies have refused to comment.Role of Qatar HoldingsOne of Xstratas biggest shareholders (Around 10%) is seeking improved merger terms  Qatar believes that an exchange ratio of 3.25 new Glencore shares for every one existing Xstrata share will properly recognizing the intrinsic stand-alone value of Xstrata  Qatar holdings with Xstrata investors can block the deal with only a 16.5 percent stake Glencore is not allowed to vote on the deal.  Richard Buxton, head of UK equities at Schroders said: ". From day one weve said this is a deal Glencore needed more than Xstrata, given Xstratas balance sheet and cash flow. The strength of Xstratas balance sheet and cash flow was never reflected in the exchange ratio."Executive Compensation  Shareholders angered by the hefty executive retention payments [170 million pounds offered to 73 key executives] tied to the deal that do not have any performance hurdles.Copyright © 2012 IIFT. All rights reserved P a g e |20
  • 23. Merger and Acquisition Project: Glencore & Xtrata  Xstratas chief executive Mick Davis alone was due to receive 30 million pounds over three years.  The Association of British Insurers had issued a "red top" alert indicating serious concerns about the pay packages.  The retention packages, which may now be changed to include a performance link and more equity rather than pure cash, are intrinsically part of the deal meaning that a vote against the pay deal would effectively be a vote against the takeover itself.4.1. Investment Banks InvolvedBanks advising Xstrata Barclays Bank Plc. Goldman Sachs Nomura International International Plc • Brett Olsher • William Vereker • Luca Ferrari • William Barter J.P. Morgan • Shaun Treacy Limited • Ian Hannam • Barry Weir Deutsche Bank • Neil Passmore • Nigel Robinson • Khaled Fathallah • Nick BowersBanks are expected to earn as much as 70 Million USD from each side of the merger.Alongside the big firms Michael S. Klein is acting as a “strategic adviser” to both companieschief executives.Copyright © 2012 IIFT. All rights reserved P a g e |21
  • 24. Merger and Acquisition Project: Glencore & Xtrata Banks advising Glencore BNP Paribas Credit Suisse Corporate Securities Finance Citigroup Global Markets Limited •David Wormsley •Simon Lindsay Morgan Stanley •Tom Reid and Co. Ltd. •Michel Antakly •Laurence Hopkins •Alastair CochranCopyright © 2012 IIFT. All rights reserved P a g e |22
  • 25. Merger and Acquisition Project: Glencore & Xtrata 5. Why the Delay? Issues & Challenges facedThe merger talks between Glencore and Xstrata had been going on for years under thecode name "Everest." The agreement was finally announced as Xstrata, based in Zug,Switzerland, reported a 22% rise in 2011 earnings to $5.7 billion, and an 11% increase inrevenue.The transaction would create a conglomerate worth some $90 billion and the successorcompany would be a global leader in zinc and thermal coal as well as a top-five producer ofcopper and nickel.But, Xstratas shareholders are unhappy. They believe that in the attempt to create a miningbehemoth they are being short-changed. Xstrata brings better assets, a stronger balancesheet and rosier prospects for growth. On the other hand investors have had troubleunderstanding and valuing Glencores trading business. Its shares change hands for muchless than their initial offer price. The deal is seeing an opposition on two fronts: • Price • Executive compensationAnother trouble that Glencore faced was a recent European Commission ruling that wouldmean that a failed merger between Glencore and Xstrata could lead to the break-up of thetwo companies’ marketing agreements and land the Glencore with serious governance anddebt issues.Marketing has always played a crucial role in the relationship between Glencore andXstrata, and is one of the reasons why the two firms have decided to walk up the aisle afterso many years. Metals and minerals marketing accounted for $1.2 billion or 65% of incomefrom Glencore’s marketing activities last year. If the merger fails and the companies remaincompetitors, market advisory agreements in place between the two companies, whichinvolve sharing of pricing and production information, would breach anti-trust laws and needto be revised, possibly scrapped.The most pressing problem for Glencore would surround its debt. A few years ago,Copyright © 2012 IIFT. All rights reservedGlencore saw its credit derivative spreads widen sharply amid concerns over its exposure P a g e |23
  • 26. Merger and Acquisition Project: Glencore & Xtratato short-term debt, even though it had sufficient cash and credit lines at hand. At the time,there was talk of a downgrade to junk status. If that threat returns, Glencore could well faceanother run on its credit default swaps.Glencore, the world’s largest publicly traded commodities supplier, is barred by the U.K.’stakeover code from voting its 34 percent stake in Xstrata. This meant that Xstrata investorswith a joint 31.75 percent stake would be able to block the payment plan and holders with16.5 percent could vote down the merger and this is what posed troubles for Glencore.Major Xstrata shareholders oppose the deal in its present form • Edinburgh-based Standard Life Investments and Schroders, based in London, which together own 5.6% of the shares needed for approval, wish to vote against the proposed merger of Xstrata with Glencore because it undervalues their shares and are holding out for a bigger premium. • The Qatar Investment Authority (QIA) holder of nearly 11% of Xstrata shares, announced it was "seeking improved merger terms" for the proposed Glencore- Xstrata tie-up.5.1. Issues on the Price TermsThe Qatar Investment Authority (QIA), the sovereign wealth fund noted that an exchangeratio of 3.25 Glencore International shares for each Xstrata share would provide a moreappropriate distribution of the benefits of the merger than the original 2.8 exchange ratioagreed upon by the boards of Glencore and Xstrata. Qatar wants Glencore to increase itsoffer by 16 percent.QIA claimed that at the time of announcement a single Xstrata share would buy 2.67Glencore shares, which suggested that the market ascribes a meaningful probability offailure to the deal.Copyright © 2012 IIFT. All rights reserved P a g e |24
  • 27. Merger and Acquisition Project: Glencore & Xtrata5.2. Executive CompensationGlencore and Xstrata, are seeking to complete the merger by next quarter and hareconsidering changing proposed retention payments for Xstrata executives that have drawnthe ire of investors.As per the current terms of the deal, retention payments were being offered without any linkto performance. Changes may include tying the 172.8 million pounds ($270 million) inplanned payments to Xstrata Chief Executive Officer Mick Davis and 72 other executivesmore closely to the future performance of the combined company.The new compensation plan • Retention awards would be paid entirely in shares of the combined entity rather than cash. • Retention awards for Xstratas senior management other than three executive directors and six other members of the executive committee will be paid in equal tranches one year and two years after the deals closing. These payments will not be subject to any performance targets. • Retention awards for the executive directors and executive committee members will be tied to performance targets pertaining to cost synergies. • Retention awards will vest if the company achieves cost savings in excess of the $50 million in cost savings already identified in the previously articulated $500 million per annum synergy estimate. • Maximum vesting would occur if incremental cost savings exceed $300 million within two years of the deals close.Further doubts exist on the Retention Plan • Based on Xstrata’s history of measuring cost savings from its own operations, the Xstrata management team might not have any trouble finding the level of savings necessary to justify a payout. • Over the past five years, the company claims it has achieved an astounding $1.87 billion in cumulative cost savings ($374 million per year). • With such a track record, another $350 million over two years doesnt seem to be hard.Copyright © 2012 IIFT. All rights reserved P a g e |25
  • 28. Merger and Acquisition Project: Glencore & Xtrata • Problem is that the claimed savings are unavoidably unverifiable by outsiders or even by Xstrata itself. • Capitalizing the cumulative claimed savings offers some perspective on the matter. Assuming a multiple of 6.5 times would suggest $12.2 billion in value creation in only five years. This is equal to roughly one third of the companys market capitalization, making the savings claim rather hard to take seriously.Xstratas investors are probably hoping to improve the terms of the deal rather than to stopit. The chances are that the merger will go ahead.Copyright © 2012 IIFT. All rights reserved P a g e |26

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