Xstrata’s shareholders are being asked to swallow hard and accept Glencore’s terms
One more thing about the miserly premium that Glencore has offered in its bid for Xstrata: it looks even less generous when you look at another huge all-paper transaction proposed a few years ago by a member of the big mining club.
Andrew Keen, analyst at HSBC, reminds us that BHP Billiton initially offered a 21% premium when it bid for Rio Tinto at end of 2007. Tom Albanese, Rio’s boss, reckoned that was “ball parks” away from fair value. Even when BHP raised its offer from three to 3.4 of its shares for every Rio share, Albanese protested about a “significant” undervaluation.
The BHP/Rio deal eventually dribbled away before shareholders had a chance to vote – it was killed by a combination of competition concerns and the collapse in commodity prices in 2008. But the point still holds: even with an all-share deal, BHP knew it had to offer a substantial takeover premium.
By contrast, Xstrata’s management has agreed to sell out at a 8% premium based on the pre-leak share prices. Even using the two firms’ convoluted calculation based on Xstrata’s pre-leak price and Glencore’s post-leak price (apples and pears, in other words), the number still comes out at only 15%. By the BHP/Rio yardstick, that’s still extremely low.
Xstrata’s shareholders are being asked to swallow hard and accept the terms because, as chief executive Mick Davis put it, he’s working in “the universe of the possible”. Well, yes, Glencore already owns 34% of Xstrata, so there’s no hope of generating a full auction. But how about flogging off parts of Xstrata?
Keen reckons the copper assets, in particular, would be in high demand. He estimates they could be worth $50bn based on recent transactions in the sector – that would be equivalent to 69% of Xstrata’s enterprise value (equity plus debt) for a division contributing 47% of profits. That sounds a reasonable deal on paper.
Of course it’s a fantasy until somebody makes such an offer – as Davis might say, it’s not part of today’s universe. But it would make life interesting if a big miner, with a taste for mischief, made a cash-for-copper proposal to Xstrata. That would stir the debate about Xstrata’s real value.