Terms being finalised in Glencore and Xstrata merger

Pressure is intensifying on Glencore International and Xstrata as the two companies finalise their proposed merger terms. Sources close to the global commodity leaders suggest shareholders will vote down the proposal if the terms of the deal remain unchanged.

The mining industry is set for a shakeup under the proposed deal, creating a mega-company with an estimated market value of around $60 billion. The two areas causing the most controversy and throwing doubt on the success of the merger are executive compensation for Xstrata executives and the price of the merger.

Some investors are unhappy with the generous terms for existing Xstrata executives in view of the tight economic climate faced by many shareholders. Also at issue is the purchase price, which is for a share swap of 2.8 Glencore shares per Xstrata share. Under new proposals, Glencore may need to up its price offer.

The vote for the merger will take place at a meeting on July 12 and Xstrata investors need to approve the new share offer and the retention package separately. It is likely that unless new options are put at the meeting, the merger will be voted down and blocked by shareholders.

Negotiations are ongoing between the companies to work out a compromise that will satisfy shareholders. If talks are not able to resolve the issues, it is unlikely the merger would proceed, scuttling plans for the creation one of the largest mining companies in the world.

Qatar Holdings, one of Xstrata’s major shareholders which had been pushing for the merger under the existing terms and conditions now reportedly favors a new deal, with a share swap ratio 3.25 being its preferred option. The 10% shareholder is an influential investor in Xstrata, being the second largest behind Glencore’s 34%.